CNA Re's restructuring and proposed sale of London Market subsidiary CNA Reinsurance Company Ltd has left the market confused as to the company's intentions towards London.
On the 2 August, the reinsurer announced that it is “seeking a buyer” for its London operation on the same day that its parent CNA Financial Corporation took a second quarter $384mn charge for reinsurance losses. However, the reinsurer also announced that it intends to "maintain its presence in London to provide access to international business produced by London brokers". The company claimed that it is “investigating several options for doing business in London over the long term and will announce more specific details as they develop.”
What is clear, however, is that the parent is disgruntled by the losses emanating from London. CNA Re announced that it was “pleased that CNA Financial Corporation has reaffirmed its commitment to CNA Re and its global reinsurance business by agreeing to work toward making Continental Casualty Company (CCC) paper available to CNA Re's brokers and clients through a CCC branch office in Zurich”. CNA Re also confirmed that all US reinsurance business will now be accessed direct from its Chicago office, by-passing London.
CNA’ actions follow poor results from its London operation, which has been dogged with uncertainties relating to working compensation carve-out exposures. The reinsurer recently settled a dispute with the Blunt consortium over the controversial Ships crews carve-out scandal which some industry wags nicknamed Unicover Lite.
While details of the settlement are subject to a confidentiality agreement, The Insurance Insider estimates that the reinsurer would have to agreed to pay a substantial proportion of the estimated $60mn of losses to obtain closure. The business was placed by Monument Insurance Brokers allegedly via John Cackett’s Bermudian mga Centaur Underwriting Ltd.
Overall, CNA Financial Corp has taken a $384mn charge for estimated reinsurance losses related principally to the CNA Re London. The company claimed that the reserve strengthening related to a “number of lines, including excess of loss liability and professional liability in accident years 1997 to 2000”. The Insurance Insider understands that the reinsurer also suffered deterioration on its US medical malpractice book, European property catastrophe book and unlimited stop losses from their parent’s US motor warranty account. For the first six months, CNA Re’s combined ratio was 114 percent compared to 109 percent for the first six months of 2000.
On 23 July rating agency A M Best lowered the financial strength rating of CNA Reinsurance co Ltd London to A from A and “placed it under review with negative implications.” Best’s indicated that the rating reverse would be substantially worse were it not for the $25mn capital contribution and guarantee of liabilities until the end of 2002 provided by its parent Continental Casualty Company. Best's further states that “The parent has also provided a stop loss agreement covering liabilities arising from 1990 and prior years including asbestosis and pollution reserves.”
CNA Re London's problems however pale into relative insignificance compared to those of its parent CNA Financial Corp, which took a second quarter charge of $2.1bn to increase reserves for asbestos and environmental claims. As a result, the insurer announced a $1bn limited stock offer and the Loews Corporation, the family owned business that has an 87 percent stake in CNA Financial Corp, said it will buy any of the stock offering that is not taken up.
The news of the charge and rights offering coincided with a second quarter net loss of $1.76bn ($9.61 per share) compared with net income of $330mn ($1.80 per share) for the same quarter in 2000. CNA's book value per share was $41.43 at the end of the second quarter, compared with $52.64 at the end of 2000.
Loews, controlled by billionaire, septuagenarian investors Larry and Bob Tisch, also has majority stakes in cigarette maker Lorillard Tobacco, Loews Hotels, Diamond Offshore Drilling and watchmaking firm Bulova. The company’s stock lost more than $1.1bn in market value as its share price fell on the news of CNA’s losses and charges.
Following suit CNA’s shares dropped 11 percent on the day of the announcement and have continued to fall to a 52 week low of $28.60 on 21 August, valuing the company at $5.37bn. Standard and Poor's was unimpressed with the insurer’s remedial actions and placed the company on “CreditWatch with negative implications.” The rating agency expressed concern “with the magnitude of the charge and, in particular, the adverse loss development of non-asbestos related claims”.