CNA Surety Downgraded
A.M. Best Co. downgraded the financial strength ratings to "A" (excellent) from "A+" (superior) of the members of the CNA Surety Corporation Group based in Chicago. The rating 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. The reserve charge does reflect a more conservative reserving philosophy to incorporate continued exposure to a number of severity losses. Management is confident that its bulk reserve position is more than adequate to cover any severity issues that may arise on a going forward basis.
Odyssey Re Affirmed
A.M. Best Co. has affirmed the financial strength ratings of Odyssey Reinsurance Group based in Wilmington, Del., of an "A" (excellent). In addition, Best has assigned the financial strength rating of "A" (excellent) 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. These attributes are supported by Odyssey's diversified geographic client base, combined with its broad product capability and an opportunistic business philosophy.
During the past five years, Odyssey 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. Growth has occurred from robust opportunities emanating from a hard market, market dislocations and capacity shortages in specific global regions. 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.
