CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed all ratings for W.R. Berkley Corporation (Berkley) and its related property/casualty operating subsidiaries. These ratings include Berkley's 'A-' Issuer Default Rating (IDR), as well as its senior debt, subordinated debt, and Insurer Financial Strength (IFS) ratings. A complete list of rating actions follows at the end of this release. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's rating affirmation reflects Berkley's favorable long-term financial results, modest exposure to catastrophe losses, and its strong underwriting culture and niche market positions in several lines, partially offset by average capitalization and relatively high financial leverage.
Berkley continued to generate solid underwriting results in 2012 with a 97.2% GAAP combined ratio compared to 98.5% in 2011. Results improved partially due to lower catastrophe losses of $80 million in 2012 versus $153 million in 2011, offset by lower favorable reserve development from increased loss-cost trends observed by the company. Although the company has experienced premium rate increases, Fitch believes underwriting profits are likely to improve only modestly in 2013 due to continued competitive insurance market conditions and recognizing the lag time between premiums written and earned.
Over the past five years, shareholders' equity has increased by over 40%, including 9% in 2012, to $4.3 billion despite share repurchases and a special dividend paid at year-end 2012, reflecting solid earnings and improved investment performance. Fitch believes the company remains adequately capitalized when examined against traditional measures on an absolute basis and relative to peers due in part to the inherent uncertainty surrounding its long-tail loss reserves for which ultimate liabilities are difficult to estimate.
Berkley's debt-to-total capital ratio of 32.9% as of Dec. 31, 2012 is above peer averages and is up from 30.6% in 2011 due to its $350 million senior debt issuance which prefunded the refinancing of debt that matured in 2013. The spike in leverage was temporary and remains reasonable for the rating category and for a company with Berkley's profile. Pro forma year-end debt-to-total capital was 30.8% following the debt repayment. Fitch expects run-rate leverage to stay near 30% and earnings-based interest coverage in the mid-upper single digits in the near term.
Fitch believes that Berkley is positioned to grow opportunistically following increased premium growth and rate increases in all lines. Despite reporting growth in 2012, GAAP operating leverage (net premiums written to common equity) remained relatively low at 1.1 times (x) reflecting Berkley's willingness to shrink its top line when prices do not support its underwriting guidelines, which Fitch views favorably.
RATING SENSITIVITIES
Key rating triggers that could lead to a positive rating action include: 1) a sustained material reduction in debt-to-total capital to low double-digits; 2) a material increase in risk-adjusted capitalization; and 3) continued profitable operating performance including maintenance of loss reserve adequacy and solid underwriting performance on an absolute basis and relative to peers.
Key rating triggers that could lead to a negative rating action include: 1) a material reduction in capitalization due to higher than expected losses in its investment portfolio, material adverse reserve development, or poor underwriting results; 2) a sustained deterioration of operating performance on an absolute basis or relative to peers.
Additionally, a material increase in Berkley's run-rate debt-to-total capital ratio to 35% could lead to Fitch expanding the notching between Berkley's IDR and its debt rating, resulting in a one-notch downgrade to the company's senior and subordinated debt ratings.
Fitch has affirmed the following ratings:
W.R. Berkley Corporation
--IDR at 'A-';
--$200 million 5.6% senior debt due 2015 at 'BBB+';
--$150 million 6.15% senior debt due 2019 at 'BBB+';
--$300 million 7.375% senior debt due 2019 at 'BBB+';
--$300 million 5.375% senior debt due 2020 at 'BBB+';
--$76 million 8.7% senior debt due 2022 at 'BBB+';
--$350 million 4.625% senior debt due 2022 at 'BBB+';
--$250 million 6.25% senior debt due 2037 at 'BBB+'.
W.R. Berkley Capital Trust II
--Trust preferred securities at 'BBB-'.
Acadia Insurance Company
Admiral Insurance Company
Berkley National Insurance Co.
Berkley Regional Insurance Company
Berkley Regional Specialty Insurance Co.
Carolina Casualty Insurance Co.
Continental Western Insurance Co.
Firemens Ins Co of Washington DC
Nautilus Insurance Company
Tri State Insurance Co. of Minnesota
Union Insurance Company
Union Standard Lloyds
--IFS at 'A+'.
Berkley Insurance Company
--IFS at 'A'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
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