S&P Assigns ‘A’ Rating to Allied World’s Swiss Sub; Outlook Positive

September 1, 2011

Standard & Poor’s Ratings Services has assigned its ‘A’ financial strength rating to Allied World Assurance Co. AG (AW Switzerland), a newly formed operating subsidiary of Bermuda-based operating company Allied World Assurance Co. Ltd. (Allied World; A/WatchPos/–). The ultimate parent company is Allied World Assurance Co. Holdings AG (AWH; BBB+/Watch Pos/–), which is also based in Switzerland.

S&P has also placed the rating on AW Switzerland on CreditWatch with positive implications. The status conforms to the rating agency’s previous action in placing the “ratings on all the group members on CreditWatch positive after AWH signed a definitive agreement of amalgamation with Transatlantic Holdings Inc. (BBB+/Watch Pos/–).”

The rating on AW Switzerland is based on the explicit support of Allied World Assurance Co. Ltd. (Allied World), a wholly owned operating company of Allied World Assurance Co. Holdings AG (AWH). Accordingly, “we view AW Switzerland to be core to the group, and as a result, we have assigned it the same financial strength rating that the group’s other operating companies have,” S&P explained.

“The new company, which began operations on May 4, 2010, and licensed by the Swiss Financial Market Supervisory Authority (FINMA) on March 31, 2011, has been capitalized with 50 million Swiss francs [$62.56 million] and has written a modest amount of property/casualty business, primarily for Switzerland-based clients. The operating company may also write treaty reinsurance for multiple lines of business for cedants throughout Europe.”

In addition S&P explained that the counterparty credit rating on the ultimate parent (AWH) and the financial strength ratings on its operating subsidiaries reflect the “subsidiaries’ strong operating performance since inception, strong capitalization, and strong enterprise risk management program.”

However, S&P also noted that “pricing in the casualty insurance lines remains soft, and we believe that Allied World might not be able to sustain the reduction in loss costs and claims frequency in those lines of business. Inflation could exacerbate this situation if loss reserves and current pricing 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 reserves adequacy 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.”

Credit analyst Tracy Dolin added: “The ratings on Allied World are on CreditWatch positive to reflect our view that the group’s competitive position could improve as a result of the impending merger with Transatlantic Holdings Inc. Upon the completion of the merger by year-end 2011, we would expect to raise the ratings on Allied World by one notch. If the transaction isn’t completed, we would likely affirm the ratings, all else being equal.”

In addition S&P observed that even if the merger with Transatlantic doesn’t go through, it nonetheless expects that Allied World “will increase premiums by the mid to high single digits in 2011 because of small regional accounts business and opportunistic growth in its global reinsurance and international writings.

“Considering the above-average catastrophe loss levels in first-quarter 2011 and excluding further favorable development, the group’s operating results will likely remain strong, with a combined ratio near 100 percent and a return on revenue of about 10 percent. The expense ratio will likely continue to increase, though at a slower pace, over the next two years as a result of Solvency II compliance, further expansion into the U.S., and increased investment in operational procedures. We expect that the group’s capital adequacy will be very strong.”

Source: Standard & Poor’s

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