CHICAGO--(BUSINESS WIRE)--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 'A-'.
Fitch has also affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Allied World's property/casualty and reinsurance subsidiaries. A full list of ratings follows at the end of this release.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's affirmation of Allied World's ratings reflects the company's consistently strong underwriting profitability, low financial leverage, solid capitalization and well-managed reserve risk. The ratings also reflect potential volatility from large catastrophe-related events, recent significant growth rate in premiums, potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business, and increased allocation to higher yielding alternative investments.
Allied World has experienced sizable recent premium growth greater than the market and most peers, with net written premiums up 17.8% in the first half of 2013, following a 19.8% increase for full year 2012. The company grew across each of its three major reporting segments, benefiting from rate improvement, particularly on U.S. casualty and property lines, as well as from strong retention across all segments. However, Fitch cautions that such rapid growth can create additional risks in underwriting quality and pricing adequacy on new business, especially during a period of market competitiveness.
Allied World reported an improved calendar-year combined ratio at 83.9% in first-half 2013, down from 85.2% at mid-year 2012. Allied World reported net earnings of $157 million in first-half 2013, although 2nd quarter net earnings were modestly negative, largely due to $115 million of mark-to-market losses in the companies fixed-income trading portfolio during the quarter.
The company maintains an invested asset portfolio with 72.7% invested in fixed-income securities with average credit ratings of 'AA-', while maintaining 10.0% of its invested assets in cash and short-term assets at June 30, 2013. Allied World also has an increasing position in higher yielding alternative investments and equity securities which total 17.3% of the company's total invested assets, up from 10.9% at mid-year 2012. The additional allocation to the alternative investments and equities provides an opportunity to generate increased investment returns in the current low-yield environment, but also introduces additional risk to the company's overall portfolio.
Allied World has reported strong returns from its hedge fund and private equity investments in the first half of 2013. The company reported realized gains of $44.1 million from these investments in the first half of 2013.
Allied World has a history of conservative reserving practices and has benefited from an average of 18.8 percentage points on the combined ratio of favorable reserve development during the period 2008 and 2012. Allied World reported $92.5 million of reserve releases in the first half of 2013, representing 9.5% of half-year net earned premium.
The company generates the vast majority of its earned premium through primary commercial liability lines business, both U.S. and international, with commercial reinsurance business representing approximately one third of the company's premium allocation. Allied World also writes property business and is exposed to the effects of industry-wide catastrophe losses, but to a lesser extent than its Bermuda peers.
Fitch views Allied World's capitalization as strong. Total shareholders' equity increased by 1.4% to $3.4 billion at June 30, 2013, led by positive net earnings, offset somewhat by $82 million of share repurchase activity during the first half of the year. Allied World uses a moderate amount of financial leverage in its capital structure. At June 30, 2013, debt securities represented approximately 19.1% of the company's more than $4.2 billion of capital.
Fitch believes that Allied World uses a conservative amount of operating leverage relative to (re)insurer peers, with net premiums written-to-total shareholders' equity averaging 0.47x over the past five years.
RATING SENSITIVITIES
Key rating triggers that could result in a downgrade include a material loss of capital, calendar-year combined ratio that exceeds 100%, continued growth in premiums considerably greater than peers, significant adverse reserve development, increases in underwriting leverage above a 1.0x net written premiums-to-equity ratio, financial leverage increasing above 25%, and catastrophe loss experience that greatly exceeds the company's probable maximum loss estimates.
While a near-term upgrade in ratings is unlikely, key rating triggers that could generate longer term positive rating pressure include continued favorable underwriting results in line with higher rated property/casualty (re)insurer peers; material improvement in key financial metrics (e.g. net premiums written to equity) to more overcapitalized levels; and enhanced competitive positioning while maintaining strong profitability with low earnings volatility.
Fitch affirms the following ratings with a Stable Outlook:
Allied World Assurance Company Holdings, Ltd.
--IDR at 'A';
--$500 million 7.50% senior notes due Aug. 1, 2016 at 'A-';
--$300 million 5.50% senior notes due Nov. 1, 2020 at 'A-'.
Allied World Assurance Company, Ltd.
Allied World Assurance Company (U.S.) Inc.
Allied World National Assurance Company
Allied World Reinsurance Company
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Aug. 2013)
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715468
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=803926
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