S&P Raises Allied World’s Ratings

June 8, 2011

Standard & Poor’s Ratings Services raised its ratings on Bermuda-based Allied World Assurance Co. Holdings AG and its operating subsidiaries by one notch. The counterparty credit rating on the holding company was raised to ‘BBB+’ from ‘BBB’ and the counterparty credit and financial strength ratings on its core operating subsidiaries has been raised to ‘A’ from ‘A-‘. The outlook for the ratings is stable.

“The ratings upgrade reflects the company’s strong financial profile, which encompasses a track record of strong operating results, with a five-year average combined ratio of 81 percent and a return on revenue [ROR] of 34 percent from 2006 to 2010, as well as strong investments and capitalization for the rating,” explained credit analyst Tracy Dolin.

S&P noted that Allied World “continues to outperform its peer group and has a good track record of favorable reserve development. The company’s earnings quality is strong considering that its standard deviation is lower than many of its peers. In addition the ratings upgrade also takes into account our view that its enterprise-risk management (ERM) is strong.”

The rating agency said the “upgrade reflects the subsidiaries’ strong operating performance since inception, strong capitalization, and strong ERM.” However, S&P added that “soft pricing remains in casualty lines,” and it believes that “Allied World might not be able to sustain the reduction in loss costs and claims frequency in those lines.”

In addition S&P noted that this “concern is augmented under an inflationary environment where loss reserves and current pricing might prove to be inadequate to support future claims leading to potential adverse reserve development. Although we view Allied World’s reserving approach as conservative, its short operating history and consequently limited internal loss experience make its adequacy of reserves less certain. We also believe that the company’s appetite for growth and expansion, even amid soft market conditions, could contribute to further significant shifts in its risk profile.

“We expect the group to increase premiums by the mid-to-high-single digits in 2011 primarily as a result of its small regional accounts business and opportunistic growth in its global reinsurance and international writings. Although we think the group’s split between casualty and property will remain relatively consistent with previous years, we think that it will continue to shift the lines that it writes to smaller, regional clients and away from national, excess lines.”

S&P also indicated that “considering the above-average level of catastrophe losses in the first quarter of 2011 and excluding further favorable development, operating results likely will remain strong, with a combined ratio near 100 percent and an ROR of about 10 percent. The expense ratio likely will continue to increase, yet at a slower pace, over the next two years as a result of Solvency II compliance, further expansion into the U.S. business, and increased investment in operational procedures. We expect capital adequacy to be very strong.”

However, S&P concluded that “positive rating actions” are “unlikely in the intermediate term due to limited upside to the company’s competitive position on an organic basis.” In addition S&P said it could “take a negative rating action if Allied World does not meet our expectations, if operating results deteriorate significantly in the absence of reserve releases, or if the company’s risk profile changes materially without sufficient risk management controls in place.”

Source: Standard & Poor’s

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