Fitch Affirms Allied World's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of Allied World Assurance Company Holdings, Ltd (Allied World) as follows:

--Issuer Default Rating (IDR) at 'A-';

--Senior debt at 'BBB+'.

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. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation of Allied World's ratings reflects the company's underwriting profitability in the current softened reinsurance market, solid capitalization, well-managed reserve risk, and modest reduction of higher-risk invested assets. The ratings also reflect potential volatility from large catastrophe-related events, and potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business.

AWH's market position and size/scale are characterized as 'Medium' by Fitch when measured by net written premiums 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.

Fitch views Allied World's capitalization as strong, with metrics such as GAAP operating leverage (net premiums written-to-total shareholders' equity) 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 0.59x in the five years between 2011-2015.

Total shareholders' equity increased by 1.5% to nearly $3.6 billion at June 30, 2016, as net earnings of $228 million was modestly offset by $140 million of share repurchase activity during the first six months of the year.

Allied World decreased the amount of financial leverage in its capital structure on Aug. 1 2016, as the company used the proceeds of its $500 million 4.35% senior debt due 2025, issued in October 2015, for the repayment of its outstanding $500 million 7.50% senior notes. Allied World's reported financial leverage (debt-to-total capital excluding FAS 115, unrealized gains on fixed income investments) as of June 30, 2016, was 26.9%. Pro forma financial leverage, following the debt repayment, decreased to 18.6%.

Allied World reported an overall combined ratio of 94.3% in first half 2016 (1H16), up modestly from 94% in the prior year period. The company's underwriting ratios improved in its two largest segments, North American Insurance and Reinsurance, in the first six months of 2016. However, the Global Markets Insurance segment results deteriorated in 1H16, as the combined ratio increased to 118.6%, up from 108.6% in the prior year period.

Allied World's net earnings of $228 million through 1H16 generated a strong annualized net return on equity of 12.8%. The improvement in earnings was largely the result of $117.7 million of mark-to-market gains in the company's fixed-maturity investment portfolio during the year that it reports through the income statement, compared to $27.2 million of mark-to-market losses in the prior year period.

Pre-tax fixed-charge coverage (excluding realized gains) declined to 4.6x through 1H16 as the company reported higher levels of interest expense related to its $500 million senior note issuance in October 2015. Fitch calculates pro forma fixed-charge coverage of 8.6x for 1H16, excluding the senior notes that matured on Aug. 1, 2016, up from the prior five-year average from 2011-2015 of 6.3x.

Allied World benefited from $63 million of reserve releases reported through the first six months of 2016, representing 5.3% of net earned premium, down from 7.0% in the prior year.

RATING SENSITIVITIES

Key rating triggers that could result in a downgrade include:

--Deterioration in (re)insurance sector fundamentals or consolidation in the (re)insurance landscape that Fitch viewed as weakening Allied World's competitive position, operating profile or overall profitability;

--Failure to maintain a multi-year average calendar-year combined ratio of 100% or better;

--Material loss of capital that leads to an increase in underwriting leverage above a 1x net written premiums-to-equity ratio or financial leverage sustained above 25%;

--Catastrophe loss experience that greatly exceeds the company's probable maximum loss estimates.

Key rating triggers that could lead to an upgrade include:

--Enhanced scale and relative competitive position with maintenance of current operating performance in the challenging (re)insurance environment;

--Underwriting results and returns on capital in line with higher-rated property/casualty (re)insurer peers.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings with a Stable Outlook:

Allied World Assurance Company Holdings, Ltd

--IDR at 'A-';

--$300 million 5.50% senior notes due Nov. 1, 2020 at 'BBB+';

--$500 million 4.35% senior notes due Oct. 29, 2025 at 'BBB+'.

Allied World Assurance Company, Ltd

Allied World Assurance Company (U.S.) Inc

Allied World National Assurance Company

Allied World Insurance Company

--IFS at 'A+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009920

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009920

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1 312-368-3263
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1 312-606-2321
or
Committee Chairperson
Mark E. Rouck, CFA, CPA
Senior Director
+1 312-368-2085
or
Media Relations
Hannah James
+ 1-646-582-4947
New York
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1 312-368-3263
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1 312-606-2321
or
Committee Chairperson
Mark E. Rouck, CFA, CPA
Senior Director
+1 312-368-2085
or
Media Relations
Hannah James
+ 1-646-582-4947
New York
hannah.james@fitchratings.com