KEY RATING DRIVERS
Fitch's rationale for the affirmation of CNA's ratings reflects the company's strong capitalization, stable earnings, and adequate reserve position in ongoing p/c operations. The ratings also reflect anticipated challenges in a competitive property/casualty market rate environment and the potential for adverse reserve development in the runoff of long-term care business.
CNA's financial leverage ratio was 19% at first-half 2016 (1H16), in line with previous years and below the current rating tolerance of 25%. GAAP fixed charge coverage was 5.6x for 1H16, down from 7.0x in 1H15. The decrease was attributable to lower investment income and higher non-catastrophe current accident year losses, partially offset by higher net favorable reserve development. Fitch expects that over the next 12-18 months CNA's earnings-based interest coverage will modestly improve over current levels.
The reported property/casualty GAAP combined ratio was 96.8% for 1H16, an improvement over 1H15 of 98.6%; however, on an accident year basis 1H16 deteriorated 3.0 pp to 101.7% over the same period in the prior year. From a segment perspective, The International segment underperformed with several large losses, but modest improvement is anticipated for full-year 2016 results.
The company reported
CNA's capital position remains solid with stated GAAP stockholders' equity of
Fitch's rating rationale continues to recognize Loews' ownership of CNA, as the company benefits from the financial flexibility of a strong majority owner and is able to manage the company with a more long-term approach. Loews has demonstrated its support of CNA over the years through various actions that have improved CNA's capitalization. Fitch views Loews' continued commitment as likely to reduce the magnitude of potential downgrades should CNA's creditworthiness deteriorate, but considers CNA's ratings standalone.
Key rating triggers that could lead to an upgrade include:
--Improved view of long-term care reserve adequacy;
--Strong operating performance with a return on earnings (ROE) of 9% and a sustained GAAP calendar year combined ratio for the ongoing property/casualty business of approximately 100% or better;
--Maintaining a Prism score of 'Very Strong' or higher for several consecutive years and maintain debt-to-total capital below 25%.
Key rating triggers that could lead to a downgrade include:
--Decline in ROE below 6% and sustained combined ratio of 105% or worse;
--Adverse GAAP reserve development in excess of 5% of prior year's equity;
--Achieving a Prism score of 'Adequate' or below or debt-to-total capital maintained above 30%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
CNA Financial Corporation
--IDR at 'BBB+';
--IFS at 'A'.
Additional information is available on www.fitchratings.com
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