CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Alleghany Corporation (Alleghany) as follows:
--Issuer Default Rating (IDR) at 'A-';
--Senior debt at 'BBB+'.
Fitch has also affirmed the ratings for 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 for Transatlantic's property/casualty reinsurance subsidiaries and the 'A' IFS rating for RSUI Group, Inc.'s (RSUI) property/casualty insurance subsidiaries.
The Rating Outlook is Stable.
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
Fitch's affirmation of Alleghany's ratings reflects the company's strong earnings, conservative capitalization, modest financial leverage, strong fixed charge coverage, and favorable financial flexibility. These positive factors are partially offset by exposure to possible adverse reserve development due to the relatively large portion of loss reserves related to casualty lines as well as Fitch's negative sector outlook on global reinsurance.
Alleghany posted net income of $387 million through the first nine months of 2016, compared with $404 million in the first nine months of 2015. These results are driven by solid underwriting performance in both its reinsurance and insurance segments, with manageable catastrophe losses and favorable loss reserve development at Transatlantic and RSUI.
Alleghany reported a nine-month 2016 consolidated combined ratio of 92%, which included 4.3 points for catastrophe losses and 7.1 points of favorable reserve development. This is up from 89.3% for the first nine months of 2015, which included lower catastrophe losses of 1.7 points and reduced favorable reserve development of 4.8 points. Alleghany continues to report reasonable underlying run-rate accident-year combined ratios normalized for average catastrophes in the mid-90s.
Transatlantic posted a combined ratio of 93.9% for the first nine months of 2016, which included 4.1 points of catastrophe losses and 7.4 points of reserve releases. RSUI's nine-month 2016 combined ratio of 79.4% included catastrophe losses of 6.6 points and a prior year reserve release benefit of 7.1 points. Notably, Transatlantic's net premiums written (NPW) increased a sizable 26% in the first nine months of 2016 driven by a large whole account quota share treaty with Farmers Insurance entered into in the fourth quarter of 2015.
Transatlantic recently entered into a five-year agreement with General Reinsurance Corporation (GenRe) under which Transatlantic acts as the exclusive underwriting manager on behalf of GenRe for U.S. and Canadian broker market treaty reinsurance business written on and after Aug. 1, 2016. This partnership favorably expands Transatlantic's reinsurance business opportunities and adds fee income for managing the underwriting and liabilities, while providing GenRe broker reinsurance market access, which is beyond its traditional direct-only capacity.
Fitch believes Alleghany utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with statutory NPW to policyholders' surplus in 2015 of approximately 0.6x in both its reinsurance operations and insurance operations. Total GAAP stockholders' equity of $8.1 billion at Sept. 30, 2016 is up 7% from $7.6 billion at Dec. 31, 2015. This growth is due to continued net income and an increase in unrealized gains on debt securities, partially offset by share repurchases and a slight decrease in unrealized investment gains on equity securities.
Alleghany's financial leverage ratio was reasonable for the rating category at 14.9% as of Sept. 30, 2016, down slightly from 15.5% at Dec. 31, 2015 due to strong shareholders' equity growth. Operating earnings-based interest coverage was a strong 8.7x in the first nine months of 2016 and 8.4x in full-year 2015. Fitch expects Alleghany to maintain coverage levels of at least 7x.
Alleghany maintained a beneficial amount of holding company cash and marketable securities of $948.7 million at Sept. 30, 2016. Fitch believes this resource provides the company an additional cushion in meeting potential operating subsidiary company cash flow shortages and liquidity to service its debt.
RATING SENSITIVITIES
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 subsidiary capitalization that caused net written premiums-to-surplus to exceed 1.0x for reinsurance operations and 1.2x for insurance operations; 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 include continued favorable underwriting results in line with higher rated property/casualty (P/C) (re)insurer peers and enhanced competitive positioning into a larger market position and size/scale while maintaining strong profitability with low earnings volatility. In addition, the ratings of its subsidiary, RSUI, could be upgraded should Fitch consider the ratings core relative to Transatlantic and apply a single group IFS rating.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Alleghany Corporation
--Long-term 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+';
--$300 million 4.9% senior notes due Sept. 15, 2044 at 'BBB+'.
Transatlantic Holdings, Inc.
--Long-term IDR at 'A-';
--$350 million 8% 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'.
The Rating Outlook is Stable
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 15 Sep 2016)
https://www.fitchratings.com/site/re/887191
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014796
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014796
Endorsement Policy
https://www.fitchratings.com/regulatory
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