Fitch Affirms Alleghany's Ratings; Outlook Stable
CHICAGO -- September 5, 2013
Fitch Ratings has affirmed the ratings of Alleghany Corporation (Alleghany) as
--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:
--IDR at 'A-';
--Senior debt at 'BBB+'.
In addition, Fitch has affirmed the 'A+' Insurer Financial Strength (IFS)
rating of Transatlantic's property/casualty reinsurance subsidiaries and the
'A' IFS rating of RSUI Group, Inc's (RSUI) property/casualty insurance
subsidiaries. The Rating Outlook is Stable. A complete list of ratings is
provided 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. The ratings also reflect operating challenges
in the highly competitive, property/casualty (re)insurance market, remaining
integration risk from the March 2012 acquisition of Transatlantic and
potential exposure to adverse reserve development on sizable casualty
Alleghany posted net income of $310 million through the first six months of
2013, down from $669 of net earnings for the comparable prior year period and
$702 million for full year 2012. The decline in 2013 was primarily due to a
$495 million one-time gain on the bargain purchase of Transatlantic in first
quarter 2012, partially offset by $33.8 million of transaction costs incurred
in the first quarter of 2012.
Alleghany reported a six-month 2013 consolidated combined ratio of 87.8%,
which included 3.5 points for catastrophe losses and 6.2 points of favorable
reserve development, up from 82% for first-half 2012, which included a lower
1.5 points for catastrophe losses and minimal favorable reserve development.
This compares to a combined ratio of 94.1% for full-year 2012, which included
approximately 12.0 points for catastrophe losses, primarily from $412 million
of Hurricane Sandy losses. Alleghany continues to report reasonable underlying
run-rate accident year combined ratios normalized for average catastrophes in
Fitch believes that Alleghany utilizes a reasonable amount of operating
leverage comparable to (re)insurer peers, with net premiums written to total
shareholders' equity of about 0.8x, including annualized premiums from
Transatlantic. Alleghany's total GAAP stockholders' equity of $6.5 billion at
June 30, 2013 is up from $6.4 billion at Dec. 31, 2012, as favorable net
income was partially offset by a decline in unrealized gains on fixed
maturities from a rise in interest rates and modest share repurchases.
Alleghany's financial leverage ratio was reasonable for the rating category at
21.7% as of June 30, 2013, down slightly from 22.8% at Dec. 31, 2012. However,
this level is up from 9.5% at Dec. 31, 2011, reflecting an additional $1.1
billion (fair value) of debt from the Transatlantic acquisition and $400
million of senior notes issued by Alleghany in June 2012 to replenish holding
company cash following the acquisition.
Operating earnings-based interest coverage improved to approximately 9.4x in
the first half of 2013, following 2.0x in 2012 and 4.9x in 2011 as operating
earnings have improved with manageable catastrophe losses and favorable
earnings contributions from Transatlantic. Fitch expects the company to
maintain coverage levels of at least 7x.
Alleghany maintained a beneficial amount of holding company cash and
marketable securities of $699 million at June 30, 2013. 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.
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 over the long term include
continued favorable underwriting results in line with higher rated
property/casualty (re)insurer peers; material improvement in key financial
metrics (e.g. net premiums written to equity) to more overcapitalized levels;
and enhanced competitive positioning while maintaining strong profitability
with low earnings volatility. In addition, the ratings of RSUI could be
upgraded over time should Fitch consider the ratings core relative to the
ratings of Transatlantic.
Fitch affirms the following ratings with a Stable Outlook:
--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'.
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'.
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 (Aug. 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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Brian C. Schneider, CPA, CPCU, ARe, +1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
James B. Auden, CFA, +1-312-368-3146
Julie Burke, CPA, CFA, +1-312-368-3158
Brian Bertsch, +1-212-908-0549
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