Fitch Places W. R. Berkley's Ratings on Negative Watch; Subs' IFS Ratings Affirmed, Stable Outlook
OREANDA-NEWS. Fitch Ratings has placed W. R. Berkley Corporation's (Berkley) ratings on Rating Watch Negative, including the 'A-' Issuer Default Rating (IDR) and existing senior and subordinated debt ratings. Fitch has also assigned a 'BBB-' rating, on Negative Watch, to Berkley's new $290 million issuance of subordinated notes maturing in 2056. Berkley's property/casualty operating subsidiaries' Insurer Financial Strength (IFS) ratings have been affirmed with a Stable Outlook. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The placement of W. R. Berkley's holding company ratings on Rating Watch Negative reflects an expected increase in financial leverage resulting from the recently announced issuance of $290 million of subordinated debentures. Berkley's pro forma financial leverage ratio (debt-to-total capital ratio excluding FAS 115) increases to 36.1%, up from the reported level of 33.4% as of March 31, 2016. Fitch has previously stated that an increase in financial leverage above 35% could result in a downgrade of holding company ratings. This would be accomplished via a widening of the notching between Berkley's operating company IFS ratings and holding company debt ratings.
Should Berkley not demonstrate an improving trend in financial leverage over the next six to 12 months, all holding company ratings will likely be downgraded by one notch.
Operating interest coverage through the first quarter of 2016 (1Q16) was 6.3x, up from 5.6x for full year 2015. Fitch calculates pro forma interest coverage, including the new subordinated debentures of 5.6x for 1Q16.
The affirmation of W.R. Berkley's operating subsidiaries' IFS ratings reflects Berkley's favorable long-term financial results with solid statutory capitalization despite aggressive capital management, a strong underwriting culture with niche market positions in several lines, and modest exposure to catastrophe losses. These positive factors are partially offset by high financial leverage and reserve risk stemming from long-tail casualty lines.
Berkley maintains a 'medium' market position and scale with net premiums written of $6.2 billion at Dec. 31, 2015 and shareholders' equity of $4.75 billion at March 31, 2016. The company has a broad product portfolio that provides diversified sources of revenue and the flexibility to emphasize various products when market conditions are favorable, thus reducing the company's dependence on any single product line.
Berkley generated very solid GAAP underwriting results in the 1Q16 with a 93.5% combined ratio following a full year 2015 combined ratio of 93.7%. Although the company has experienced premium rate increases, Fitch believes underwriting profits are likely to improve only modestly in 2016 due to continued competitive insurance market conditions, recognizing the lag time between premiums written and earned, and reduced favorable reserve development.
A one notch downgrade of Berkley's holding company ratings is predicated on the observation of a clear march over the next six to 12 months towards a financial leverage ratio below 35%. Ratings would likely be affirmed and removed from Rating Watch Negative should financial leverage demonstrate the noted improvement.
Other key rating triggers that could lead to a downgrade of both Berkley's IFS and holding company ratings include:
--Operating interest coverage below 5.5x;
--Net leverage moving to above 5.0x due to higher than expected losses in the investment portfolio, material adverse reserve development, or poor results;
--A deterioration of operating performance including a consistent underwriting loss.
Key rating triggers that could lead to an upgrade of Berkley's IFS and holding company ratings include:
--A sustained reduction in financial leverage to the low-mid 20%'s; combined with,
--Continued profitable operating performance including a sustained combined ratio in the mid-90%'s and maintenance of aggregate loss reserve adequacy; and,
--Maintenance of Fitch's Prism capital model score of 'Very Strong'.
FULL LIST OF RATING ACTIONS
Fitch has placed the following ratings on Rating Negative Watch:
W. R. Berkley Corporation
--$150 million 6.15% senior debt due 2019, 'BBB+';
--$300 million 7.375% senior debt due 2019, 'BBB+';
--$300 million 5.375% senior debt due 2020, 'BBB+';
--$76 million 8.7% senior debt due 2022, 'BBB+';
--$350 million 4.625% senior debt due 2022, 'BBB+';
--$250 million 6.25% senior debt due 2037, 'BBB+';
--$350 million 4.75% senior debt due 2044, 'BBB+';
--$350 million 5.625% subordinated debentures due 2053, 'BBB-'.
--$100 million 5.9% subordinated debentures due 2056, 'BBB-'.
Fitch has assigned the following ratings with a Negative Rating Watch:
W. R. Berkley Corporation
--$290 million 5.75% subordinated debentures due 2056 at 'BBB-'.
Fitch has affirmed the following ratings with a Stable Outlook:
Acadia Insurance Company
Admiral Insurance Company
Berkley Insurance Co.
Berkley National Insurance Co.
Berkley Regional Insurance Company
Berkley Regional Specialty Insurance Co.
Carolina Casualty Insurance Co.
Continental Western Insurance Co.
Firemens Ins Co of Washington DC
Nautilus Insurance Company
Tri State Insurance Co. of Minnesota
Union Insurance Company
Union Standard Lloyds
--IFS at 'A+'.