CNA Surety Downgraded

A.M. Best Co. downgraded the financial strength ratings to "A" (excellent) from "A+" (superior) of the members of Chicago-based CNA Surety Corporation Group. The outlook is negative.

The rating action follows CNA Surety's announced $88 million third quarter 2003 reserve charge arising from its completed reserve reviews. The reserve charge resulted in a steep drop in surplus that more than negated all of the organic surplus growth that had occurred in the prior five-year period. In addition, the group has experienced a five-year downward trend of underwriting and operating profitability. The negative rating outlook is pending CNA Surety's demonstration of reserve adequacy, and resulting operating profitability, in addition to organic surplus generation that would be considered commensurate with an "A" rating. The third quarter charge primarily consisted of reserve strengthening relating to 2003, which included an unusual amount of large claim activity. In particular, seven principals accounted for approximately $50.6 million of net reserve development. Management is confident that its bulk reserve position is more than adequate to cover any future severity issues.

St. Paul's Debt on Watch Positive

Following the recently announced merger plans of The St. Paul Companies Inc. (SPC) and Travelers Property Casualty Corp., Fitch Ratings placed its "BBB+" long-term senior debt and "F2" commercial paper ratings of The St. Paul on rating watch positive.

Concurrent with the SPC rating actions, Fitch placed Travelers' ratings, including Travelers "A" long-term senior debt rating, on watch negative, meaning the ratings could either remain the same or be lowered one notch. Fitch expects to upgrade SPC's long-term debt rating to "A-" or "A" at the close of the merger, subject to further analysis. The merger will reportedly create the nation's second largest commercial lines insurer and largest independent agency writer in the U.S.

Travelers utilizes less financial and operating leverage, and generates higher run-rate earnings levels, than SPC. As a result, Fitch believes that the merged company's earnings-based interest coverage will be moderately higher than that currently generated by SPC. Fitch also believes that over time, the merged company will benefit from enhanced scale and efficiencies.

Due to SPC's and Traveler's large size and relative complexity, Fitch believes that this merger carries a significant amount of integration risk, which is mitigated somewhat by the management teams involved. Several members of SPC's senior management team were members of Travelers' senior management team before moving to SPC and Fitch believes that they have a good understanding of both companies' operations and cultures. In addition, SPC has experience integrating operations, due to its 1998 merger with USF&G Corp. and its 1996 acquisition of Allstate's commercial line companies.

One of Fitch's key rating concerns for SPC has been the reserve adequacy of the company's run-off lines of business, and the potentially dampening affect those run-off lines could have on the company's earnings. Given the enhanced earnings profile and capital base of the merged company, Fitch would view this as less of an issue going forward should the merger be executed as planned.

Clarendon Downgraded

A.M. Best Co. downgraded the financial strength rating of Clarendon Insurance Group to "A-" (excellent) from "A" (excellent), and its property/casualty affiliates. The outlook is stable.

Clarendon's downgrade reflects the recent downgrade of its parent Hannover Re based in Germany to "A" (excellent) from "A+" (superior) and the elevated credit risk maintained by Clarendon due to its above-average reinsurance recoverables. Best is concerned with the general decline in credit quality of the reinsurance sector, to which Clarendon is significantly exposed based on its business profile as a program writer that cedes a significant portion of its direct writings to its reinsurance partners. Clarendon continues to benefit from its relationship with Hannover, but not to the extent supportive of the "A" (excellent) rating. The stable rating outlook reflects Clarendon's established presence as a leading program writer, its strong operating results, steady surplus generation and management's efforts to reduce the group's credit risk in the near term.

Odyssey Re Affirmed

A.M. Best Co. affirmed the financial strength ratings of Odyssey Reinsurance Group based in Wilmington, Del., of an "A" (excellent). In addition, the financial strength rating of "A" (excellent) was assigned to Hudson Specialty Insurance Company in New York, a newly purchased reinsured affiliate of Odyssey.

The affirmation of Odyssey's ratings reflects excellent and improving stand-alone capitalization, disciplined historical underwriting performance, strong and sustained earnings momentum and its position in the global reinsurance market. The company also has a diversified geographic client base, broad product capability and an opportunistic business philosophy. During the past five years, it has reported more favorable underwriting results compared with Best's professional reinsurer's composite average. Together with an astute investment strategy as well as access to the capital markets, Odyssey's risk-adjusted capitalization has been supportive of its significant growth in the last three years. Estimated 2003 projections indicate financial leverage will remain at approximately 20 percent at the holding company level, supported by fixed charge and cash coverage ratios in the high single digit range, which are well within the acceptable range of its rating category. Offsetting these positive attributes is Odyssey's elevated operating leverage relative to its peers and the potential for adverse reserve development emerging from its older long-tail casualty reserves and more recently, from its aggressive growth in new business. Best expects the company to temper and manage its operating leverage at lower levels for the 2004 accident year as it continues to augment its capital position from both internal and external sources. Best is maintaining a negative rating outlook.

Guarantee of North America Affirmed

A.M. Best Co. affirmed the financial strength rating of "A" (excellent) of the Guarantee Company of North America based in Montreal, Canada. Best also affirmed the "A-" (excellent) financial strength ratings of the U.S. subsidiaries, GCNA USA, Mount Laurel, N.J., and Mid-State Surety Corp., Grosse Pointe Farms, Mich. The outlook for all the ratings is stable.

The ratings reflect GCNA's excellent capitalization, favorable operating performance, and its strong branding and marketing presence. GCNA maintains a significant market share in the Canadian fidelity and surety sector, and benefits from an experienced management team and conservative underwriting and operating practices. The company also created new business opportunities and expanded its surety line by acquiring Mid-State Surety Corp. and GCNA USA. Partially offsetting the positives are the competitive market conditions in Canada and the Ontario auto market. However, GCNA lessened the impact with increased rates, more conservative risk selection and territorial diversification. Continued focus will be on integrating its U.S. subsidiaries and improving their operating performance.