Ratings Roundup: Elwood, Taiping (Singapore), Topiary Capital (Cat Bonds)

May 2, 2011

A.M. Best Co. has upgraded the issuer credit rating (ICR) to “bbb+” from “bbb” and affirmed the financial strength rating (FSR) of’ B++’ (Good) of Bermuda-based Elwood Insurance Limited, and has revised its outlook for the ICR to stable from positive; the outlook for the FSR is stable. Best described Elwood’s capitalization and operating performance as having been and continues to “robust.” However, Best also noted that the ratings “are the result of its ultimate parent, Celanese Corporation’s balance sheet leverage, which acts as a constraint on Elwood’s rating profile. Nevertheless, Elwood’s ICR upgrade reflects Celanese’s improved operating performance, evidenced by an increase in Elwood’s operating results at year-end 2010.” In addition Best noted that Elwood’s ratings “recognize its excellent capitalization level, history of positive operating performance, conservative loss reserving practices and effective management of exposures. Over the past five years, return on surplus has averaged 19.4 percent, while surplus levels have increased at a compound annual growth rate of 15.4 percent through the accumulation of net profits.” As partial offsetting factors Best cited “the balance sheet leverage of the parent, which could negatively impact the operations of its captive. Additional offsetting rating factors are Elwood’s exposure to some low frequency, high severity hazards in its risk profile, coupled with high gross limits and high net retentions.” Best explained that the revised outlook for Elwood’s ICR “acknowledges Celanese’s financial results, which remain subject to general economic activity.” Best added that it remains “concerned about the potential for a fragile economic recovery, which drives Celanese’s financial performance. However, manufacturing activity related to industrial segments where Celanese operates seems to be showing improvement from prior years 2009 and 2010, which is fueled by global demand. Celanese’s risk management team takes an enterprise-wide approach to managing its risks and utilizing Elwood as an integral tool in this process. Elwood has utilized its relationships and those of Celanese to develop a variety of unique and non-correlating third party exposures, which provide a favorable enhancement to Elwood’s overall book of business. Nonetheless, Elwood’s long-term growth opportunities primarily depend on Celanese’s business success.”

A.M. Best Co. has assigned a financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” to China Taiping Insurance (Singapore) Pte. Ltd. (CTIS), both with stable outlooks. Best said the ratings reflect CTIS’ “adequate risk-adjusted capitalization, improvement of its underwriting performance and conservative reserving practice. The ratings also acknowledge operational support from its affiliation with China Taiping Insurance Group (HK) Company Limited, primarily pertaining to investment, reinsurance capacity and enterprise risk management.”” Best noted that CTIS’ risk-adjusted capitalization in fiscal years 2009 and 2010 “stood above 200 percent, as measured by Best’s Capital Adequacy Ratio (BCAR) and the Singaporean risk-based capitalization (RBC).” The rating agency added that it anticipates the company’s risk-adjusted capitalization “will remain adequate in the near term with expected continued favorable net income. The management also expects to maintain its local RBC over 200 percent.” Best also pointed out that CTIS’ underwriting performance has “been improving since 2007. The company has reported a combined ratio of less than 92 percent since 2007 compared to 96 percent in 2006. Notable increases in the company’s underwriting income since 2008 are mainly attributable to premium rate adjustments and management’s focus on the quality of the portfolio. CTIS has a historically prudent reserving practice, which enables it to constitute a reserving buffer.” As partial offsetting factors, Best cited “the soft market conditions in Singapore, especially in the motor and commercial lines, and the potential volatility in greater claims experience stemming from higher retention of risks in the work injury compensation book compared to previous years. Although CTIS reported underwriting profits from its work injury compensation portfolio in 2010, its ability to continuously record favorable income from this book remains to be seen.”

A.M. Best Co. has downgraded the debt rating to “ccc” from “bb+” on $200 million Series 2008-1 Class A principal-at-risk variable rate notes due August 5, 2011, issued by Cayman Islands-based Topiary Capital Limited (the issuer). Best also removed the rating from under review with developing implications and assigned a negative outlook. The rating action “reflects confirmation from the calculation agent, Risk Management Solutions, Inc., that the Japan earthquake, which occurred on March 11, 2011 was an activation event,” Best explained. “The notes are now at risk for loss of principal and interest if subsequent covered events occur during the remaining risk period.” The notes initially provided Platinum Underwriters Bermuda, Ltd. with up to $200 million in second and subsequent event coverage for qualifying U.S. hurricane and earthquake, European windstorm and Japanese earthquake events over a three-year period.

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