Fitch Affirms W. R. Berkley's Ratings; Outlook Stable
KEY RATING DRIVERS
Fitch's rating affirmation reflects Berkley's favorable long-term financial results with solid 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 relatively high financial leverage and reserve risk stemming from long-tail casualty lines.
Berkley continued to generate very solid underwriting results through the first six months of 2015 with a 94% GAAP combined ratio compared to 94.2% for the same period in 2014. This follows a profitable full year 2014 with a 93.8% combined ratio compared to 95.1% in 2013 due to both improved loss and expense ratios. Although the company has experienced premium rate increases, Fitch believes underwriting profits are likely to improve only modestly in 2015-2016 due to continued competitive insurance market conditions, recognizing the lag time between premiums written and earned, and reduced favorable reserve development.
Common shareholders' equity has increased by over 25% during the past five years to $4.5 billion as of June 30, 2015 despite share repurchases, special dividends, and industry wide record catastrophe losses during the period, reflecting solid earnings and investment gains. Fitch believes the company remains adequately capitalized when examined against traditional measures on an absolute basis and relative to peers.
Berkley's financial leverage ratio (debt-to-total capital ratio excluding FAS 115) of 33.8% as of June 30, 2015 is above peer averages but favorably below the company's five-year average. Fitch expects run-rate leverage to stay near the low-thirties with earnings-based interest coverage remaining near 6x. Operating interest coverage through six months 2015 was 5.4x, down from 6.8x for the same period in 2014 partially due to a temporary increase in interest expense from prefunded debt and reduced earnings from realized investment gains. Fitch believes financial leverage is manageable and within both Fitch's expectations for the company and Fitch's sector credit factor guidelines for the rating category.
Fitch believes that Berkley remains positioned to grow premium opportunistically with increased exposures and rate. Despite reporting significant growth in 2013 and 2014, GAAP operating leverage (net premiums written to common equity excluding FAS 115) remains relatively low under 1.5x. Net leverage was roughly 4.4x at Dec. 31, 2014, similar to recent years.
Key rating triggers that could lead to a positive rating action include:
--A sustained reduction in financial leverage to low-mid 20%'s;
--Continued profitable operating performance including a sustained combined ratio in the mid-90%'s and maintenance of aggregate loss reserve adequacy;
--Maintenance of Fitch's Prism capital model score of 'Very Strong'.
Key rating triggers that could lead to a negative rating action include:
--Net leverage above 5.0x;
--A material reduction in capitalization due to higher than expected losses in its investment portfolio, material adverse reserve development, or poor underwriting results;
--A deterioration of operating performance such that there is a consistent underwriting loss.
Additionally, a material increase in run rate debt to total capital ratio, or financial leverage ratio (debt to total capital excluding FAS 115), to 35% could lead Fitch to expand the notching between Berkley's IDR and debt rating, resulting in a one-notch downgrade to the senior and subordinated debt ratings.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
W. R. Berkley Corporation
--IDR at 'A-';
--$150 million 6.15% senior debt due 2019 at 'BBB+';
--$300 million 7.375% senior debt due 2019 at 'BBB+';
--$300 million 5.375% senior debt due 2020 at 'BBB+';
--$76 million 8.7% senior debt due 2022 at 'BBB+';
--$350 million 4.625% senior debt due 2022 at 'BBB+';
--$250 million 6.25% senior debt due 2037 at 'BBB+';
--$350 million 4.75% senior debt due 2044 at 'BBB+';
--$350 million 5.625% junior subordinated debentures due 2053 at 'BBB-'.
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+'.
The Rating Outlook is Stable.