Best Downgrades CNA’s Elwood to ‘B++’

October 7, 2004

A.M. Best Co. announced that it has downgraded the financial strength rating to “B++” (Very Good) from “A-” (Excellent) of Bermuda-based Elwood Insurance Limited, a single parent captive of CNA Holdings Inc, and has placed the rating under review with negative implications.

“This rating action follows the recent acquisition by an outside investment group of Elwood’s ultimate parent, Celanese A.G.,” said Best. “This transaction has significantly increased Celanese’s debt and could impact the captive’s business profile. The debt is held at a newly formed holding company of Celanese, BCP Caylux Holdings Luxembourg S.C.A. On October 1, 2004, an agreement was scheduled to take effect that allows the investment group to have additional rights to control management and to share in the profits and losses of Celanese. The rating will remain under review pending the effective date of the agreement and until A.M. Best is able to evaluate its impact on the financial strength and operations of Elwood.”

Best’s bulletin noted, however, that the rating also “reflects Elwood’s excellent capitalization level, its history of positive operating performance, conservative reserve practices and its effective management of exposures. Over the past five years, return on surplus has averaged 24.7 percent, while capital and surplus levels have grown at a compound rate of 34.0 percent through the accumulation of net profits. Elwood continues to underwrite additional lines of business from Celanese, boosting premiums and assets as well as providing diversification of risks insured. Elwood also maintains a non-correlating book of third party business, approximately equal in premium volume to that of Celanese’s risks.

“Partially offsetting these positive rating factors is Elwood’s exposure to some low frequency, high severity hazards in its risk profile, coupled with high limits and high net retentions. Additionally, there is uncertainty regarding the impact of Celanese’s acquisition by an outside party. Investments with Celanese and affiliates represent a significant percentage of its capital and surplus. Furthermore, Elwood will remain challenged to secure third party business, which provides a balance to Celanese’s risks, is equivalent to its premium volume and does not subject its capital and surplus to excessive loss potential.

“The risk management team of Celanese takes an enterprise-wide approach to managing its risks and utilizing the captive as an integral tool in this process. Elwood’s management also has demonstrated its ability to avoid the mass market of unrelated business. Instead, Elwood utilizes its relationships and those of Celanese to develop a variety of unique and non-correlating accounts, which provide a favorable enhancement to its overall book of business.”

Best indicated that “Elwood’s long-term growth opportunities primarily depend on the business success of Celanese. Long term, the captive will pursue additional lines of business, both from Celanese and its affiliates as well as with selective third party business. Historically, its association with Celanese has provided Elwood with additional financial flexibility, though there is no explicit commitment for support. However, following the acquisition, Celanese’s holding company increased its debt burden. Celanese’s own debt will increase somewhat due to the pre-funding of its pension obligations. Whether the transaction will impact Elwood’s growth opportunities or its affiliated investments will not be determined for some time.”

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