Fitch Ratings has affirmed CNA Financial Corporation's property/casualty (p/c) insurance subsidiaries' Insurer Financial Strength Ratings (IFS) at 'A+' (Strong).
Fitch also affirmed CNA's senior unsecured debt at 'BBB+' and Long-Term Issuer Default Rating (IDR) at 'A-'. The Rating Outlook for all of the ratings is Stable.
Key Rating Drivers
The rating actions consider CNA's favorable financial performance, capital, and debt servicing capabilities and financial flexibility. Offsetting the positives is CNA's exposure to the runoff of the long-term care (LTC) business and a modestly elevated expense ratio.
Fitch views CNA's financial performance and earnings as strong. For 1H21, CNA reported a combined ratio of 96%, versus 103% in the prior period, and 101% for FY 2020. For full-year 2020, the company reported $195 million in losses from the coronavirus and an additional $61 million from civil unrest, which totaled approximately 3.6 percentage points on the combined ratio. The coronavirus losses were substantially driven by healthcare professional liability, with additional impacts from workers' compensation, management liability, commercial property, trade credit and surety.
CNA's capitalization and leverage are very strong with a financial leverage ratio at 20% as of June 30, 2021. CNA's capital is evaluated on both risk-adjusted and non-risk adjusted basis. At YE 2020, CNA's Prism Score was 'Very Strong', including material unrealized bond gains in capital, and 'Strong', excluding such gains, which is consistent with Prism life methodology as the majority of bond gains come from CNA's LTC business.
Fitch believes CNA's reserves are moderately redundant in p/c lines but likely deficient in LTC. Fitch's concerns with LTC are focused on uncertainties regarding utilization and morbidity trends, ability to obtain necessary rate increases, expectations for ongoing low interest rates and long-duration claims. Given market-wide uncertainties linked to the LTC business, Fitch believes CNA's LTC reserves, and those of many other LTC insurers, will require future strengthening.
CNA is majority owned by Loews Corporation (IDR A/Stable). While CNA benefits from Loews' financial flexibility and investment expertise, Fitch's ratings on CNA and its subsidiaries are not currently uplifted due to ownership.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A material reduction in LTC exposure.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Adverse development of LTC reserves of more than $1 billion;
Sustained GAAP underwriting loss;
Sustained adverse GAAP reserve development in excess of 3% of prior year's equity;
Sustained GAAP ROE of 6% or lower;
A reduction in the overall assessment of capital factor to 'a+' or lower.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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Additional information is available on www.fitchratings.com