Fitch Ratings has affirmed
Fitch also affirmed CNA's senior unsecured debt at 'BBB+' and its Long-Term Issuer Default Rating (IDR) at 'A-'. The Rating Outlook for all of the ratings is Stable.
Key Rating Drivers
Very Strong Capital Position: CNA's capital position remains very strong. Traditional risk metrics, such as operating and financial leverage, are consistent with higher ratings per Fitch's guideline ratios.
Fitch also utilizes its Prism model to assess capital with specific charges for long-term care (LTC), and CNA scored 'Very Strong' based on YE 2022 data when excluding unrealized gains/losses and 'Strong' when including all unrealized gains/losses.
Uncertainty from LTC Exposure: CNA stopped selling individual LTC policies in 2003 and group policies in 2014, and existing groups closed to new members in early 2016, accruing approximately
However, the company took several credible steps to offset risks including policy buyouts, rate increases, and unlocking of the GAAP reserve assumptions in Q3 2020. The average age of individual block is approximately 81 years old. Risk related to the LTC exposures reduces the potential for future positive ratings actions.
LDTI Affects Financials: In
This accounting method applies to CNA's runoff business. The impact of LDTI adoption on YE 2022 stockholders' equity was negative
Strong Earnings: The overall combined ratio of 93% for full year 2022 improved 3 pp over prior year and was the lowest in over a decade and each major segment: specialty, commercial, and international improved year-over-year. The company has actively targeted reducing its expense ratio. It was 31% at YE22, an improvement from 2016's 35%. A long-term expense ratio in the high 20% to 30% range would be optimal for the company given its size of premiums written.
Modest Inflation Impact: The non-life book of business would be modestly impacted by a severe increase in inflation as prices are reset annually on most lines of business. The LTC product would be more exposed to inflationary trends as the process for obtaining rate often requires regulatory approval. Favorably, the inflationary environment has increased investment yields, which partially offsets increased costs, particularly in the LTC book of business given the longer liability duration.
Top-Tier Business Profile: Fitch views CNA's business profile as very strong, and companies with similar profiles are typically rated in the 'AA' category. CNA offers commercial p/c coverage, including surety. Products are distributed through multiple channels, targeting small, medium and large businesses.
Loews' Ownership Net Positive: CNA is a publicly traded company that is approximately 92% owned by the
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A material reduction in LTC claims exposure and maintaining capital and profitability metrics.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
If LTC reserves experience more than
Sustained GAAP underwriting loss;
Sustained 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 '
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.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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