Fitch Affirms Alleghany's Ratings; Outlook Stable

Thu Sep 5, 2013 1:37pm EDT

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(The following statement was released by the rating agency) CHICAGO, September 05 (Fitch) 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: --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 reserves. 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 the mid-90s. 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. 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. 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: 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'. 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'. Contact: Primary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst James B. Auden, CFA Managing Director +1-312-368-3146 Committee Chairperson Julie Burke, CPA, CFA Managing Director +1-312-368-3158 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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