AM Best takes Topa off negative review after takeover cancelled

By Michael Loney

Feb 7 - (The Insurer) - AM Best has removed from under review with negative implications and affirmed Topa Insurance Company’s financial strength rating (FSR) of B++ (Good) following an agreement for the Calabasas, California-based carrier being cancelled.

The rating agency also removed from under review with negative implications and affirmed Topa’s long-term issuer credit ratings (ICR), as well as taking the same action on the FSR and ICR of US Virgin Islands-based subsidiary Dorchester Insurance Company.

Topa and Dorchester are wholly owned subsidiaries of Topa Equities.

The outlook assigned to the FSRs is stable, while the outlook assigned to the ICRs is negative.

“The ratings of Topa’s members have been removed from under review with negative implications following confirmation that a previous agreement to be acquired has been cancelled,” AM Best said.

If it had been completed, the stock purchase transaction would have resulted in a newly formed private holding company acquiring 100 percent of Topa’s intermediate holding company, Topa Insurance Group.

AM Best noted that Topa’s risk-adjusted capitalisation as of the end of September 2024 has benefitted from the continued run-off of its admitted book of business.

“As legacy loss reserves run off, capital levels are expected to remain supportive of the very strong balance sheet assessment over the intermediate term. However, Topa’s risk-adjusted capitalization has been impacted by declines in policyholder surplus in recent years, due to pre-tax operating losses driven by weakened underwriting results, offset partially by capital contributions from the ultimate parent, Topa Equities Ltd to replenish surplus,” it said.

Topa Equities made capital contributions to Topa of $30mn in 2023 and $5mn in 2024.

The group’s operating results in recent years have been impacted by adverse development occurring on prior-year loss reserves in the group’s discontinued commercial auto liability and commercial multi-peril lines, which accounted for a large portion of the adverse development reported in 2022 and 2023.

The group also took substantial reserve strengthening actions to increase its year-end 2023 carried reserve position up to the midpoint estimate of the actuarial range.

“In 2024, Topa experienced significant volatility in its operating results, due primarily to sizable weather-related losses in its non-admitted homeowners and commercial package book of business,” AM Best said.

Topa has been writing this program since 2023, which focuses on catastrophe-exposed business produced by a managing general agent, with a majority of premiums written in Florida, Texas and Louisiana.

The negative ICR outlook assigned to Topa is based on pressure on its ERM assessment, driven by natural catastrophe losses and adverse reserve development, which were higher than expected in recent years.

AM Best in July last year had maintained its under review with negative implications status on Topa’s ratings following news that a recently formed private holding company had agreed to buy the specialty insurer.

The rating agency in March 2023 downgraded Topa to B++ from A- as a result of reserve strengthening on a discontinued commercial auto insurance program.

That followed Granada Financial Group earlier in 2023 agreeing a deal to buy a controlling interest in Topa. However, Topa’s website states it is still owned by Anderson Holdings, which acquired the business in 1984.

According to SNL, Topa Insurance Company wrote $94.7mn in direct premiums for the full-year 2023 with a 176.4 percent combined ratio. For the first nine months of 2024, it wrote $121.0mn in direct premiums with a 132.7 percent combined ratio.