CHICAGO--()--Fitch Ratings has affirmed the ratings of Alleghany Corporation (Alleghany) as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior debt at 'BBB'.
Fitch has also affirmed the ratings of Alleghany's wholly owned subsidiary Transatlantic Holdings, Inc. (Transatlantic) as follows:
--IDR at 'A-';
--Senior debt at 'BBB+'.
In addition, Fitch has affirmed the 'A+' Insurer Financial Strength (IFS) rating of Transatlantic's property/casualty reinsurance subsidiaries and the 'A' IFS rating of RSUI Group, Inc.'s (RSUI) property/casualty insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
KEY RATING DRIVERS
Fitch's affirmation of Alleghany's ratings reflects the company's conservative capitalization, reasonable financial leverage, sizable cash position and favorable financial flexibility. The ratings also reflect operating challenges in the highly competitive, property/casualty (re)insurance market, integration risk from the acquisition of Transatlantic and potential exposure to adverse reserve development on sizable casualty reserves.
Alleghany posted net earnings of $702 million in 2012, significantly improved from $143 million for 2011. The increase was due to a one-time gain on the bargain purchase of Transatlantic and the added operating earnings generated by Transatlantic following the completion of the merger on March 6, 2012, partially offset by the amortization of intangible assets related to the merger.
Alleghany reported a 2012 consolidated combined ratio of 94.1%, which included approximately 12 points for catastrophe losses, primarily from $412 million of Hurricane Sandy losses ($251 million for Transatlantic and $161 million for RSUI). This compares with a combined ratio of 93.4% for full-year 2011, which included 9.9 points for catastrophe losses.
Fitch believes that Alleghany utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with net premiums written to total shareholders' equity of about 0.6x in 2012, which included almost 10 months of Transatlantic premiums from the acquisition date. Favorably, Alleghany's total GAAP stockholders' equity grew by approximately $3.5 billion in 2012 to $6.4 billion at Dec. 31, 2012, due to the merger with Transatlantic.
Alleghany's financial leverage ratio (adjusted for unrealized net gains on fixed-income investments) was 22.8% at Dec. 31, 2012, which Fitch considers reasonable for the rating category. This level is up from 9.5% at Dec. 31, 2011, reflecting an additional $1.1 billion (fair value) of debt from the Transatlantic acquisition and $400 million of senior notes issued by Alleghany in June 2012.
Alleghany maintains a beneficial amount of holding company cash and marketable securities of $732 million at Dec. 31, 2012. Fitch believes that this resource provides the company an additional favorable cushion in meeting potential operating subsidiary company cash flow shortages and liquidity to service its debt.
Fitch views Alleghany's exposure to potential adverse development as being higher than the exposures of companies that focus more on property business because the duration on casualty reserves is comparatively long. However, Fitch notes that this risk appears to have been conservatively managed, supported by the fact that Alleghany's loss reserves have consistently developed favorably, with the company posting favorable GAAP net loss reserve development in each calendar year from 2004-2012, totaling 2.5% of net premiums earned.
Key rating triggers that could result in a downgrade include significant adverse loss reserve development; movement to materially below-average underwriting or operating performance; sizable deterioration in insurance subsidiary capitalization that caused net written premiums-to-equity ratio to exceed 1.0x, financial leverage maintained above 25%; run-rate operating earnings-based interest and preferred dividend coverage of less than 7x; significant acquisitions that reduce the company's financial flexibility; and a substantial decline in the holding company's cash position.
Key rating triggers that could lead to an upgrade over the long term 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. In addition, the ratings of RSUI could be upgraded over time should Fitch consider the ratings core relative to the ratings of Transatlantic.
Fitch affirms the following ratings with a Stable Outlook:
--IDR at 'A-';
--$300 million 5.625% senior notes due Sept. 15, 2020 at 'BBB';
--$400 million 4.95% senior notes due June 27, 2022 at 'BBB'.
Transatlantic Holdings, Inc.
--IDR at 'A-';
--$667 million 5.75% senior notes due Dec. 14, 2015 at 'BBB+';
--$350 million 8.00% senior notes due Nov. 30, 2039 at 'BBB+'.
Transatlantic Reinsurance Company
Fair American Insurance and Reinsurance Company
--IFS at 'A+'.
RSUI Indemnity Company
Covington Specialty Insurance Company
Landmark American Insurance Company
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended