Fitch Affirms Alleghany's Ratings; Outlook Stable

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:

--Issuer Default Rating (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 conservative capitalization, reasonable financial leverage, sizable cash position and favorable financial flexibility, as well as potential exposure to adverse reserve development on sizable casualty reserves. The ratings also reflect Fitch's current 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 across a wide range of lines.

Alleghany posted net earnings of $354 million in the first six months of 2014, compared to $310 million in first-half 2013 and $628 million for full year 2013. These favorable 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 six-month 2014 consolidated combined ratio of 89.4%, which included 2.2 points for catastrophe losses and 4.7 points of favorable reserve development, up from 87.8% for first-half 2013, which included 3.5 points for catastrophe losses and 6.2 points of favorable reserve development. This compares to a 2013 combined ratio of 90.1% for full-year 2013, which included 3.6 points for catastrophe losses and 4.8 points of favorable reserve development. Alleghany continues to report reasonable underlying run-rate accident year combined ratios normalized for average catastrophes in the mid-90s.

Fitch believes that Alleghany utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with net premiums written to statutory surplus in 2013 of approximately 0.6x for both the reinsurance operations and the insurance operations. Total GAAP stockholders' equity of $7.4 billion at June 30, 2014 is up from $6.9 billion at Dec. 31, 2013, as favorable net income and an increase in unrealized investment gains was partially offset by share repurchases.

Alleghany's financial leverage ratio was reasonable for the rating category at 19.8% as of June 30, 2014, down slightly from 20.4% at Dec. 31, 2013. In Sept. 2014, Alleghany issued $300 million of 4.9% senior unsecured notes due 2044 to redeem a portion of Transatlantic's $667 million 5.75% senior notes due Dec. 2015. Financial leverage is not expected to change given the issuance is being used to replace existing debt.

Operating earnings-based interest coverage was a strong 8.7x in both the first half of 2014 and in full-year 2013, following 2.0x in 2012 as operating earnings improved with manageable catastrophe losses and favorable earnings contributions from Transatlantic. Fitch expects Alleghany to maintain coverage levels of at least 7x.

Alleghany maintained a beneficial amount of holding company cash and marketable securities of $1,047 million at June 30, 2014. 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.

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.

The key rating trigger that could result in an upgrade to Alleghany's debt ratings includes a continued reduction in Transatlantic's outstanding senior notes, as Alleghany's senior debt is subordinated to that of Transatlantic. Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results in line with higher rated 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.

Fitch affirms the following ratings with a Stable Outlook:

Alleghany Corporation

--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 debt due Sept. 15, 2044 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'.

The Rating Outlook is Stable

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.

Applicable Criteria and Related Research:

--Insurance Rating Methodology (Sept. 4, 2014);

--Fitch Rates Alleghany's Senior Notes 'BBB' (Sept. 5, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=890415

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations:
Elaine Bailey, London, +44 203 530 1153
elaine.bailey@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations:
Elaine Bailey, London, +44 203 530 1153
elaine.bailey@fitchratings.com