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Rating Action:

MOODY'S LOWERS DEBT RATINGS OF CNA FINANCIAL CORPORATION AND LIFE INSURANCE SUBSIDIARIES; CONFIRMS RATINGS OF PROPERTY & CASUALTY INSURANCE SUBSIDIARIES

12 Nov 2003
MOODY'S LOWERS DEBT RATINGS OF CNA FINANCIAL CORPORATION AND LIFE INSURANCE SUBSIDIARIES; CONFIRMS RATINGS OF PROPERTY & CASUALTY INSURANCE SUBSIDIARIES

CNA Reports Net Loss of $1.76 Billion for Third Quarter 2003; Sets Forth Recapitalization Plan and Internal Restructuring.

New York, November 12, 2003 -- Moody's Investors Service has lowered the long- and short-term credit ratings of CNA Financial Corporation (senior unsecured debt to Baa3 from Baa2, rating for commercial paper to Prime-3 from Prime-2), as well as those of its supported debt-issuing subsidiaries and the insurance financial strength ratings of its principal US-based life insurance subsidiaries, Continental Assurance Company and Valley Forge Life Insurance Company (to Baa1 from A2) following the company's announcement today of a net loss of $1.76 billion for the third quarter of 2003. Additionally, Moody's has confirmed the insurance financial strength ratings of CNA's principal property-casualty insurance subsidiaries - members of the Continental Casualty Company and Continental Insurance Company intercompany pools - at A3. The rating actions conclude a review commenced on August 7, 2003, following CNA's announcement of losses in the second quarter of 2003 related to property/casualty insurance business written in prior years, and the possibility of further losses to be reported following the conclusion of an updated group-wide reserve analysis. The outlook for all of CNA's ratings remains negative, pending completion of the company's proposed capital plan. According to Moody's, assuming that performance stabilizes as expected, successful completion of the recapitalization plan could lead to the restoration of a stable outlook for CNA's ratings. Failure to complete the recapitalization plan would likely result in a review for possible downgrade of CNA's ratings.

At the time it initiated its rating review, Moody's said that the review would focus on three key issues:

1) The level of additional reserve strengthening, if any, which could result from the conclusion of the company's third quarter reserve review and whether such reserve strengthening will be sufficient to restore reserve levels to full adequacy with a high degree of certainty.

2) The need, if any, for additional capital and the source and form which this capital may take (i.e. intercompany contributions, loans etc.).

3) The degree of capital or other financial support that may be provided by CNA's parent, Loews Corporation.

Moody's noted that it considers CNA's reserve actions - which encompass $978 million in after-tax additions to core reserves and $517 million in after-tax additions to provisions for asbestos, environmental pollution and mass tort (APMT), as well as an increase in after-tax bad debt reserves for insurance and reinsurance receivables of $332 million - to be based on a robust analysis of virtually all of its major property-casualty policy liabilities and related reinsurance and credit-related exposures. Moody's added that it believes that the charges are based on reasonably derived best estimates for most of these policy-related liabilities and insurance and reinsurance assets, but noted that significant variability remains, particularly with respect to the APMT liabilities.

According to Moody's, the downgrade of CNA Financial's debt ratings (and those of its supported debt-issuing subsidiaries), reflects the substantial magnitude of the charges relative to the consolidated enterprise's tangible capitalization, the holding company's still significant debt burden, and its reduced financial flexibility as a result of the decreased dividend capacity of its principal subsidiaries. The downgrade also reflects the incrementally reduced financial flexibility of Loews' Corporation to provide further future support to CNA, given its significant commitment to contribute cash to CNA as part of the current recapitalization plan. Moody's noted that the confirmation of the Baa3 senior debt rating of The Continental Corporation (TCC) reflects the rating agency's expectation that internal restructuring activity at CNA will result in incremental credit enhancement for TCC, effectively putting it on a similar credit footing as CNA Financial Corp.

Moody's noted that the confirmation of the A3 insurance financial strength ratings of the Continental Casualty and Continental Insurance Company property-casualty intercompany pools is based on the significant extent to which CNA's capital plan will alleviate the burden of the announced charges on the group's capitalization levels, given significant cash proceeds to be contributed by Loews. These actions include the purchase by Loews Corp. from CNA Financial Corp. of $750 million of convertible preferred securities -- having terms that make it economically equivalent to CNA common stock -- prior to year-end 2003, as well as a commitment for up to $500 million in additional capital support through the purchase of surplus notes of CCC in the event that certain additions to CCC's statutory capital are not achieved by February 26, 2004 from business or asset sales or related transactions, and up to $150 million of additional capital prior to the end of the first quarter of 2004, in the event of additional shortfalls in relation to business and asset sales. Moody's noted that despite these significant recapitalization efforts, the risk-adjusted capitalization of CNA's principal insurance subsidiaries has declined significantly since year-end 2002, but to an extent that Moody's believes will enable it to continue to operate with a reasonable margin of safety relative to its various business and financial risks.

In lowering the insurance financial strength ratings of CNA's principal life insurance subsidiaries, Moody's noted that it views CNA's life insurance subsidiaries as being a significant potential source of capital relief for CNA's property/casualty subsidiaries, given their ownership by Continental Casualty Company, and that management's continued strategic emphasis on property/casualty insurance operations may lead to a de-emphasis of the life and group businesses.

The following ratings have been lowered:

CNA Financial Corporation:

Senior debt to Baa3 from Baa2; Senior shelf to (P)Baa3 from (P)Baa2;

Subordinated shelf to (P)Ba1 from (P)Baa3;

Junior subordinated shelf to (P)Ba1 from (P)Baa3;

Preferred stock to Ba2 from Ba1;

Rating for commercial paper to Prime-3 from Prime-2.

CNA Financial Capital I, II and III - trust preferred shelf to (P)Ba1 from (P)Baa3.

Members of the CNA Life Insurance Group - insurance financial strength to Baa1 from A2:

Continental Assurance Company;

Valley Forge Life Insurance Company.

The following ratings have been confirmed:

The Continental Corporation - senior debt at Baa3;

Members of the Continental Casualty Company intercompany reinsurance pool - insurance financial strength at A3:

American Casualty Company of Reading, Pennsylvania;

CNA Casualty of California;

CNA Lloyd's of Texas;

Columbia Casualty Company;

Continental Casualty Company;

National Fire Insurance Company of Hartford;

Transcontinental Insurance Company;

Transportation Insurance Company;

Valley Forge Insurance Company.

Members of the Continental Insurance Company intercompany reinsurance pool - insurance financial strength at A3:

Boston Old Colony Insurance Company;

The Buckeye Union Insurance Company;

Continental Insurance Company;

Continental Insurance Company of New Jersey;

Continental Lloyd's Insurance Company;

Commercial Insurance Company of Newark, New Jersey;

Continental Reinsurance Corporation;

The Fidelity and Casualty Company of New York;

Firemen's Insurance Company of Newark, New Jersey;

The Glens Falls Insurance Company;

Kansas City Fire and Marine Insurance Company;

Mayflower Insurance Company;

National-Ben Franklin Insurance Company of Illinois;

Niagara Fire Insurance Company;

Pacific Insurance Company.

CNA Financial Corporation is engaged through its subsidiaries primarily in commercial property and casualty insurance and reinsurance, and in life insurance. For the nine months ended September 30, 2003, CNA Financial Corporation reported a net loss of $1.6 billion.

New York
Alan Murray
VP - Senior Credit Officer
Insurance/Financial Institutions
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Ted Collins
Managing Director
Insurance/Financial Institutions
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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