Date: August 07, 2003
NEW YORK (Standard & Poor's) Aug. 7, 2003--Standard & Poor's Ratings Services said today that it placed its counterparty credit and financial strength ratings on Chicago, Ill.-based CNA Financial Corp. and its affiliates (collectively, CNA) on CreditWatch with negative implications.
Standard & Poor's also placed its corporate credit, senior unsecured, and subordinated debt ratings on Loews Corp. on CreditWatch with negative implications.
"These actions follow CNA's second-quarter earnings announcement that it incurred a $474 million pretax charge ($308 million after-tax) for reserve strengthening," said Standard & Poor's credit analyst John Iten. This amount includes a previously disclosed charge for its share of a 1995 fire loss, written by a pool of insurers that had been in arbitration. Despite the charge, CNA reported a $70 million net profit for the quarter due largely to net realized gains of $269 million from the sale of fixed-income securities.
About $2.1 billion of total debt was outstanding at CNA as of June 30, 2003. About $2.3 billion of total debt was outstanding at New York, N.Y.-based Loews as of June 30, 2003, excluding CNA Financial Corp., Diamond Offshore Drilling Inc., and Texas Gas Transmission LLC (TGT). (These subsidiaries are, however, included in Standard & Poor's analysis of the company on an equity basis.)
CNA also announced that it was undertaking a comprehensive review of its reserves, including a review of reserves for asbestos claims. These studies are scheduled for completion in the fourth quarter of 2003. In February, Standard & Poor's reviewed and affirmed the company's ratings. Incorporated into the analysis was the expectation that the reserves of CNA's property/casualty affiliates were deficient by 5%-8%, but that the ratings benefited from the substantial support provided by its parent, Loews Corp. and the expectation of future support if a material balance sheet deficiency arose. Standard & Poor's expects that the studies might result in an addition to reserves larger than the amount recognized in the second quarter. The ultimate effect of the reserve charges on the ratings on CNA will depend on their magnitude, capital restoration initiatives, and, perhaps most importantly, the degree to which Standard & Poor's is convinced that management has fully identified and addressed CNA's longstanding balance sheet deficiencies given the company's history of underreserving. Standard & Poor's expects to either affirm or change the ratings on CNA by the middle of fourth-quarter 2003.
Another factor that would affect the CNA financial strength rating is a change in the rating on Loews Corp. Because the ratings on CNA are supported by Loews, and the financial strength rating assigned to the core CNA insurance companies is currently only one notch below the Loews senior debt rating, any downward revision to the Loews Corp. rating or outlook would result in the same change to the financial strength rating on CNA, although the current debt ratings on CNA could potentially remain unchanged. The ratings and outlook on Loews had incorporated Standard & Poor's expectations that operating performance at insurance subsidiary CNA will continue to improve and that any future capital contributions by Loews to the insurance subsidiary would be modest. Given CNA's announcement of charges to be taken in the second quarter for reserve strengthening, as well as a planned further review of reserves, Standard & Poor's is concerned that Loews will potentially make a significant capital contribution to CNA as it has done in the past. (Loews contributed about $1.7 billion of capital to CNA during 2001-2002.) Although there is some flexibility within the ratings on Loews for