Fitch Ratings Affirms Allied World’s Ratings

August 3, 2015

Fitch Ratings has affirmed the ratings of Allied World Assurance Company Holdings, Ltd [Allied World] as follows: Issuer Default Rating [IDR] at ‘A’ and Senior debt at ‘A-’.

The ratings agency said, “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.

“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 primary premiums offset somewhat by decreases in the reinsurance portfolio, potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business, and allocation to higher yielding alternative investments.

“In addition, the ratings reflect Fitch’s negative sector outlook on global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with declining premium pricing and weakening of terms and conditions, particularly for property catastrophe risk. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive positions.

“AWH’s market position and size/scale is characterized as ‘Medium’ by Fitch when measured by net written premium and equity. Allied World maintains a unique portfolio of business lines relative to its Bermuda peers and includes a mix of primary insurance and reinsurance business.

“Allied World reported 8.8% growth in North American Insurance gross premiums written [GPW] in the first half of 2015, particularly in its General Casualty book of business. Increases in GPW in the Global Markets Insurance segment were largely a result of the inclusion of premium from the acquisition of the Hong Kong and Singapore operations of Royal & Sun Alliance Insurance Plc. [RSA] into Allied World’s results at mid-year 2015. Premium increases were largely offset however with a 13.9% decrease in reinsurance GPW. Total growth in net premiums written in the first half of 2015 [1H15] was limited to 3.8%.

“Allied World reported a calendar-year combined ratio of 94% through six-months 2015, following a six-month 2014 ratio of 85.1% as the company reported catastrophe losses of $25 million related to the New South Wales storms and $20 million of non-catastrophe weather and fire related losses in the period. Allied World reported decreased net earnings of $134 million through six-months 2015, generating an annualized net return on equity of 7.2%.

“Allied World’s results have benefited from favorable reserve development that averaged 13.7% of net earned premiums from 2010-2014. Allied World reported $85 million of reserve releases through the first six months of 2015, representing 7% of net earned premium.

“Fitch views Allied World’s capitalization as strong, with metrics such as GAAP operating [net premiums written-to-total shareholders' equity] and net leverage ratios of 0.6x and 2.2x as of year-end 2014, which are at median guidelines for the ‘AA’ rating category. Allied World has historically used a conservative amount of operating leverage relative to [re]insurer peers, averaging 0.54x in the five years between 2010-2014.

“Total shareholders’ equity decreased by 4.1% to $3.6 billion at June 30, 2015, as positive net earnings were offset by $246 million of share repurchase activity during the first six months of the year. Allied World uses a moderate amount of financial leverage in its capital structure. At June 30, 2015, debt securities represented approximately 18.5% of the company’s almost $4.5 billion of capital.”

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