Rating Agencies Downgrade CNA, Hartford After ’08 losses

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February 16, 2009

NEWS; Pg. 22

870 words

Rating agencies downgrade CNA, Hartford after '08 losses; insurers' outlooks revised

JUDY GREENWALD

Rating agencies have voiced concerns over the financial outlook for CNA Financial Corp. and Hartford Financial Services Group, after both companies reported losses for 2008.

But despite downgrades and revised outlooks by the rating agencies, both companies have options available to ensure they make it through the tough investment environment that is hurting many insurers, observers say.

CNA has the continued support of its parent, New York-based Loews Corp., and some observers say Hartford may eventually seek greater separation between its life and property/casualty operations.

CNA last week reported a $299 million net loss for 2008, including a $336 million loss in the fourth-quarter. Fourth-quarter results reflected other-than-temporary impairment investment losses of $419 million after tax and $309 million of pretax limited partnership investment losses for the quarter.

Earlier this month, Hartford reported a $2.75 billion loss for 2008 vs. a 2007 $2.95 billion profit. The 2008 results reflected a net realized capital loss of $3.6 billion after tax vs. a $560 million after tax net realized capital loss in 2007, according to the company.

But both insurers have options open to relieve their financial pressures, observers say. CNA benefits from its parent's continuing support despite its losses, said John L. Ward, chief executive officer of the Cincinnati-based Cincinnatus Financial Group, pointing to Loews' $1.25 billion capital infusion in CNA last year.

That capital ``was in anticipation of some rough times in their insurance operations, and the organization seems to be well-prepared to weather the storm,'' said Mr. Ward. ``They seem to be committed to CNA and their insurance strategy,'' he said. ``I don't see anything unusual in CNA's results considering the tough times that we're operating in.''

Brian Schneider, director at Chicago-based Fitch Ratings, said CNA's results were ``probably not out of line with what we would have expected, given their portfolio position, although the reduction in investment income from the limited partnership losses is probably more than we would have anticipated.'' Last week, Fitch downgraded the financial strength ratings of CNA's property/casualty subsidiaries to A- from A.

Loews' continued support ``helps to mitigate the potential downside, but certainly they'll probably continue to have difficulties on the investment side to the extent things don't turn around in the near term,'' given the composition of the portfolio, said Mr. Schneider.

Alan Murray, senior credit officer at Moody's Investors Service in New York., also said he expects Loews, which owns about 90% of CNA, to remain supportive. Last week, Moody's affirmed CNA's property/casualty operations' A3 financial strength ratings, but revised the outlook to negative from stable, citing its continued investment losses.

Also last week, Oldwick, N.J.-based A.M. Best Co. Inc. affirmed CNA's A financial strength rating, but changed the outlook to negative from stable.

Hartford's problems lie with its life business, observers say. Even with the $2.5 billion capital infusion made by Munich, Germany-based Allianz SE last year, there are ``some concerns about their capitalization, particularly in the life company,'' said Mr. Schneider.

In addition to its investment losses, Hartford transferred $1 billion from its property/casualty operation to its life insurance operation during last year's fourth quarter, he said.

Last week, Fitch lowered the financial strength ratings of the Hartford's property/casualty insurance subsidiaries to A+ from AA-. Its primary life insurance subsidiaries, though, were lowered two notches, to A from AA- because of ``the significant difference in their operating performance and balance sheet strength,'' said Mr. Schneider.

Moody's cut Hartford's insurance strength ratings for its property/casualty and life insurance units to A1 from Aa3 earlier this month and placed a negative outlook on its ratings.

Moody's Senior Vp Jeff Berg said Hartford's life insurance operation's ratings are being lifted by its property/casualty operation ``and we have a level of concern'' that providing the life operation with extraordinary support ``could cause further ratings deterioration in the property/casualty operation.''

Mr. Ward said there may be a scenario ``where the Hartford looks to have a greater separation'' between the life insurance and the property/casualty operation. ``Right now, their share price is suffering and it's trading well below book value, and that always hurts a company's ability to raise new capital,'' he said.

Mr. Schneider said, at this point, Hartford is ``still continuing to manage the entire company as sort of one entity, but at some point you would think if the life business was not going to recover, they would not want to pull any more money'' out of the property/casualty operation.

In addition, he noted, Hartford is looking to potentially access federal funds. He noted the insurer, which purchased a Florida savings bank last year, is one of the leading candidates to receive funds from the federal Troubled Asset Relief Program.

A Hartford spokesman wouldn't comment about splitting its property/casualty and life operations.

February 20, 2009