A.M. Best has also affirmed the FSR of A- (Excellent) and assigned the ICR of "a-" to CNAF' s life/health subsidiary, Continental Assurance Company (CAC). The outlook for this rating is stable. All companies are domiciled in Chicago, IL. (See link below for a detailed list of ratings.)
The ratings reflect CNA's favorable risk-adjusted capitalization, improved underwriting fundamentals and good business position as a top writer within the commercial lines segment of the U.S. property/casualty industry. The group's operating platform demonstrates considerable geographic and product line scope, strong service capabilities and a diversified distribution channel with well established agency relationships. CNA's policyholder retention remains strong, while cross-sell initiatives designed at selling additional policies to existing insureds continue to support new business growth. The ratings also consider CNA's financial flexibility derived through historical capital support provided by its ultimate parent, Loews Corporation. CNAF's debt-to-total capital at 15.9% and interest coverage measures are appropriate at current rating levels.
The revised outlook reflects A.M. Best's view that with substantial re-underwriting initiatives completed and the repositioning of its book of business through portfolio optimization, CNA is better positioned than in past years to produce sustainable earnings. This is further supported by management's actions to reduce expenses and improve expense competitiveness. In addition, CNA has divested non-core assets, commuted prior year reinsurance treaties and vastly improved the technological infrastructure of the company, which has enhanced data collection and segmentation and reporting tools. CNA's improved earnings outlook is expected to further strengthen 2006 statutory risk-adjusted capitalization.
Somewhat offsetting these favorable rating factors are CNA's unsatisfactory operating performance in the aggregate over the most recent five-year period, exposure to mass tort liabilities such as asbestos and environmental claims and historically adverse loss reserve development relating to core loss reserves. In 2005, CNA's operating performance was significantly impacted by reinsurance treaty commutations, catastrophe losses largely attributed to Hurricane Katrina and core adverse loss reserve development. A.M. Best expects that price softening and increased competitive forces in the U.S. commercial lines sector could pressure underwriting margins to a moderate degree.
Although the commutation of several finite reinsurance treaties added nearly $430 million to incurred losses for the calendar year, the result of these commutations reduced the group's finite recoverable exposure by greater than half. As a result, CNA's operating performance is expected to benefit from the reduction of pretax interest expense on funds withheld that have been a substantial earnings drag.
The affirmation of CAC's rating reflects the maintenance of adequate capitalization and favorable earnings, as the company manages its run off. A.M. Best notes that CAC remains somewhat exposed to below investment grade fixed income securities, which represented approximately 10% of its bond portfolio as of first quarter 2006. Somewhat offsetting this concern is the fact that CAC holds no mortgage loans or investment real estate and only minor amounts of equity investments. Additionally, the company's risk-adjusted capital as measured by Best's Ca