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Rating Action:

Moody's upgrades CNA's financial strength to A2, affirms senior debt at Baa2, stable outlook

Global Credit Research - 31 Oct 2017

New York, October 31, 2017 -- Moody's Investors Service ("Moody's") has upgraded the insurance financial strength (IFS) ratings of Continental Casualty Company and members of its intercompany pool ("CNA Insurance Companies") to A2 from A3. In the same action, Moody's has affirmed the debt ratings of CNA Financial Corporation (NYSE: CNA; senior unsecured at Baa2). The outlook for the ratings is stable.

RATINGS RATIONALE

According to Moody's, the upgrade of Continental Casualty Company and its property/casualty insurance affiliates reflects profitability improvement, particularly in its core commercial insurance operations coupled with strong capital adequacy, which can withstand significant stress scenarios. Moody's further noted that CNA's specialty insurance operations continue to perform well, and remain the group's most significant contributor to earnings and internal capital generation. CNA has strengthened its underwriting profitability in the group's commercial segment - including reducing claim volatility and shedding less profitable accounts in order to improve price-adequacy and claim-handling efficiency. The underlying combined ratio for the segment, excluding catastrophes and reserve development, has improved meaningfully to 96.3% in 2017 year-to-date from 98.5% for the same period in 2016, from above 100% in some prior years. Although catastrophe losses from Hurricanes Harvey and Irma contributed to an overall property/casualty underwriting loss for CNA's third quarter, net income for the quarter was positive and year-to-date underwriting results remained profitable through September.

CNA's discontinued long term care insurance operations will remain a significant component of the group's balance sheet and risk profile, and Moody's noted that this long duration portfolio, with its attendant sensitivity to interest rates, inflation, morbidity, mortality and persistency assumptions, will remain capital intensive. CNA continues to file for and obtain rate increases, which have generally kept pace with recent loss trends but claim trends can be highly sensitive to the changing costs of care and utilization dynamics, and future rate increases may or may not be sufficient to keep pace. However, the rating agency believes that CNA's capitalization and enhanced operational processes, as it has taken the claims processing in-house, will help absorb long-term volatility from this line of business.

The affirmation of CNA Financial's senior Baa2 debt rating primarily reflects structural subordination of the holding company's creditors relative to the policyholder obligations of Continental Casualty Company and its affiliated insurers, as well as the application of standard notching between the subsidiaries' IFS ratings and the parent's senior debt rating. Although Moody's views Loews Corporation (senior debt at A3 stable) as being a supportive parent company for CNA, the proximity of the two holding companies' ratings, together with the fact that CNA Financial itself is a significant source of credit strength for Loews, mitigates potential further benefit for CNA Financial's debt-holders, in Moody's view.

The A2 IFS ratings of Continental Casualty Company and its affiliated are based on the company's major presence in US commercial and specialty insurance, its profitable specialty insurance operations and improving core commercial business, good risk-adjusted capitalization, sound liquidity and dividend capacity, and the historically stable and supportive parentage in Loews Corporation. These credit strengths are tempered in part by stiff competitive conditions in the group's commercial insurance segments -- in part given the group's higher cost structure relative to some of its industry peers, by intrinsic earnings volatility within the company's runoff lines of business (primarily long term care), including exposures to continued low interest rates, mortality, morbidity and long term policyholder lapse behavior, and by intrinsic claim reserve volatility associated with long-term casualty business. The ratings also consider CNA's underwriting exposures to natural and man-made catastrophes, though lower than more property-focused insurers.

Factors that could lead to an upgrade include the following: 1) sustained improved underwriting performance (e.g. combined ratios in the low 90% range or below) in commercial insurance, together with continued strong profitability in the group's specialty insurance segment; 2) consolidated earnings coverage above 7x; and 3) significant de-risking or diminished size of long term care portfolio. Conversely, factors that could lead to an downgrade include the following: 1) a non-temporary decline in shareholders' equity of 10% or more (with adjustments for variability in unrealized investment gains/losses); 2) overall combined ratio consistently above 100%, and/or sustained earnings coverage below 4x; 3) adjusted financial leverage in excess of 30%; 4) annual adverse reserve development in excess of 3% of total reserves; or 5) a downgrade of Loews Corporation by more than one notch, or dividend payments by CNA's insurance subsidiaries to CNA Financial Corporation significantly in excess of the insurer's run-rate earnings.

The following insurance financial strength ratings have been upgraded:

American Casualty Company of Reading, Pennsylvania - to A2 from A3;

Columbia Casualty Company - to A2 from A3;

Continental Casualty Company - to A2 from A3;

Continental Insurance Company - to A2 from A3;

Continental Insurance Company of New Jersey - to A2 from A3;

National Fire Insurance Company of Hartford - to A2 from A3;

Transportation Insurance Company - to A2 from A3;

Valley Forge Insurance Company - to A2 from A3.

The following debt and shelf ratings have been affirmed:

CNA Financial Corporation - senior unsecured at Baa2; senior unsecured shelf at (P)Baa2; subordinated shelf at (P)Baa3; junior subordinated shelf at (P)Baa3; preferred shelf at (P)Ba1.

The outlook for the ratings is stable.

CNA Financial Corporation is an insurance holding company that is principally engaged in providing domestic and international P&C insurance and ranks among the 15 largest P&C insurers in the US. CNA Financial Corporation is approximately 90% owned by Loews Corporation. For the first nine months of 2017, CNA Financial Corporation reported net income of $676 million and total revenues of $7.1 billion. As of September 30, 2017, the company reported total invested assets of $46.7 billion and shareholders' equity of $12.2 billion.

The principal methodology used in these ratings was Global Property and Casualty Insurers published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Murray
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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