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.
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