December 13, 2016 / 8:33 PM / 8 months ago

Fitch Affirms Allied World's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, December 13 (Fitch) Fitch Ratings has affirmed the ratings of Allied World Assurance Company Holdings, Ltd (Allied World) as follows: --Issuer Default Rating (IDR) at 'A-'; --Senior debt at 'BBB+'. Fitch has also affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Allied World's property/casualty and reinsurance subsidiaries. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. KEY RATING DRIVERS Fitch's affirmation of Allied World's ratings reflects the company's modest underwriting profitability in the current softened (re)insurance market, solid capitalization, well-managed reserve risk, and modest reduction of higher-risk invested assets. The ratings also reflect potential volatility from large catastrophe-related events, and potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business. Allied World's ratings also reflect Fitch's negative sector outlooks on non-life insurance and global reinsurance. Allied World's business profile is characterized as 'Strong' by Fitch. The company maintains a unique portfolio of business lines relative to its Bermuda peers and includes a mix of primary insurance and reinsurance business. Allied World is a relatively smaller participant in a consolidating (re)insurance market and has experienced recent premium declines it its North American Insurance and Reinsurance segments with growth in its Global Markets segment. Allied World's reported modest growth in shareholders' equity in the first nine months of 2016 and maintains financial leverage and GAAP operating leverage (net premiums written-to-total shareholders' equity) at levels consistent with median capitalization guidelines for the 'AA' rating category. Total shareholders' equity increased by 2.4% in the first nine months of 2016, as net earnings of $296 million were modestly offset by $166 million of share repurchase activity. Allied World's used the proceeds of its $500 million 4.35% senior debt due 2025, issued in October 2015, for the repayment of its outstanding $500 million 7.50% senior notes on Aug. 1, 2016. Allied World's financial leverage as of Sept. 30, 2016, was 18.4%. Allied World has historically used a conservative amount of operating leverage relative to (re)insurer peers, at 0.6x on a trailing 12 month basis at Sept. 30, 2016 equal to the prior five year average of 0.6x from 2011-2015. Allied World's underwriting performance has historically fit at the low end of the 'AA' range, but the company has reported deterioration in the first nine months of 2016 and full-year 2015. As the company's mix of business shifts towards a larger allocation to its insurance segments, higher average combined ratios are expected relative to companies with a greater reinsurance focus. The company reported an overall combined ratio of 94.9% in first nine months of 2016 (9M16) and 94.0 in full-year 2015, up from the prior five year average of 89.3% from 2010-2014. Current accident-year combined ratios excluding the impact of reserve development and catastrophe losses were 98.7% and 95.9%, respectively at 9M16 and 2015, up from a 2010-2014 average of 94.9%. The company's underwriting ratios improved in its two largest segments, North American Insurance and Reinsurance, in the first nine months of 2016. However, the Global Markets Insurance segment results deteriorated in 9M16, as the combined ratio increased to 121.8%, up from 110.1% in the prior year period. Allied World generated a strong annualized net return on equity of 11% in the first nine months of 2016. The improvement in earnings was largely the result of $108.3 million of mark-to-market gains in the company's fixed-maturity investment portfolio during the year that it reports through the income statement, compared to $42.4 million of mark-to-market losses in the prior year period. Net return on equity, excluding mark-to-market gains, was 7.6% through nine months 2016. Pre-tax fixed-charge coverage (excluding realized gains) declined to 4.7x through 9M16 due to higher levels of interest expense prior to the Aug. 1, 2016 maturity of $500 million of senior notes. Mid to high single digit coverage is associated with the 'A' rating category. Fitch calculates pro forma annualized fixed-charge coverage of 8.5x for 9M16, excluding the matured senior notes, up from the prior five-year average from 2011-2015 of 6.3x. Reserve adequacy is viewed as 'Neutral', 'A' category, as the company has historically reported significant favorable development but has experienced declining levels of reserve releases in recent reporting periods. Allied World benefited from $93 million of reserve releases reported through the first nine months of 2016, representing 5.3% of net earned premium, up from 5% in the prior year but down considerably from the average of 13.8% from 2010-2014. RATING SENSITIVITIES Key rating triggers that could result in a downgrade include: --Deterioration in (re)insurance sector fundamentals or consolidation in the (re)insurance landscape that Fitch viewed as weakening Allied World's competitive position, operating profile or overall profitability; --Failure to maintain a multi-year average calendar-year combined ratio of 100% or better, along with net return on equity excluding mark-to-market gains (losses) lower than 6%; --Material loss of capital that leads to an increase in underwriting leverage above a 1x net written premiums-to-equity ratio or financial leverage sustained above 25%; --Catastrophe loss experience that greatly exceeds the company's probable maximum loss estimates. Key rating triggers that could lead to an upgrade include: --Enhanced scale and relative competitive position with maintenance of current operating performance in the challenging (re)insurance environment; --Underwriting results and returns on capital in line with higher-rated property/casualty (re)insurer peers. --Maintaining multi-year average calendar-year combined ratio below 90% and net return on equity excluding mark-to-market gains (losses) above 15%. FULL LIST OF RATING ACTIONS Fitch affirms the following ratings with a Stable Outlook: Allied World Assurance Company Holdings, Ltd --IDR at 'A-'; --$300 million 5.50% senior notes due Nov. 1, 2020 at 'BBB+'; --$500 million 4.35% senior notes due Oct. 29, 2025 at 'BBB+'. Allied World Assurance Company, Ltd Allied World Assurance Company (U.S.) Inc Allied World National Assurance Company Allied World Insurance Company --IFS at 'A+'. Contact: Primary Analyst Christopher A. Grimes, CFA Director +1-312-368-3263 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Committee Chairperson Mark E. Rouck, CFA, CPA Senior Director +1-312-368-2085 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016411 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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