Fitch Upgrades Alleghany Senior Debt to 'BBB+'; Affirms IDR and IFS Ratings
KEY RATING DRIVERS
Fitch's upgrade of Alleghany's senior debt rating reflects the expected continued reduction in Transatlantic's outstanding senior notes to approximately 26% of total company debt (down from 42% at June 30, 2015 and 59% at year-end 2013) at year-end 2015 as the company plans to utilize cash and investments at Transatlantic to fund the payment of Transatlantic's $367 million senior notes at maturity on Dec. 14, 2015. Alleghany's senior debt remains subordinated to that of Transatlantic. However, given the more limited remaining amount of Transatlantic debt and an expectation of any future company debt to be issued out of Alleghany, Fitch has aligned the senior note ratings of the two holding companies.
Fitch's affirmation of Alleghany's ratings reflects the company's conservative capitalization, reasonable financial leverage, sizable cash position and favorable financial flexibility, as well as potential exposure to adverse reserve development on sizable casualty reserves.
The ratings also reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive position.
Fitch believes that Alleghany utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with net premiums written to statutory surplus in 2014 of approximately 0.63x for the reinsurance operations and 0.67x for the insurance operations. Total GAAP stockholders' equity of $7.65 billion at June 30, 2015 is up from $7.5 billion at Dec. 31, 2014. This growth is due to favorable net income and a slight increase in unrealized gains on equity securities, partially offset by share repurchases and a decrease in unrealized investment gains on debt securities.
Alleghany's financial leverage ratio was 18.9% at June 30, 2015, which Fitch considers within guidelines for the current rating category, down slightly from 19.4% at Dec. 31, 2014. Operating earnings-based interest coverage was a strong 8.3x in first half 2015 and 9.0x in 2014. Fitch expects Alleghany to maintain coverage levels of at least 7x.
Alleghany maintained a beneficial amount of holding company cash and marketable securities of $1.3 billion at June 30, 2015. 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.
Net earnings of $308 million were posted through the first six months of 2015, compared with $354 million in first-half 2014 and $679 million for full year 2014. These favorable results are driven by solid underwriting performance in both its reinsurance and insurance segments, with manageable catastrophe losses and favorable loss reserve development at Transatlantic and RSUI.
The company reported a six-month 2015 consolidated combined ratio of 88.4%, which included only 0.8 points for catastrophe losses and 4.6 points of favorable reserve development, down from 89.4% for first-half 2014, which included 2.2 points for catastrophe losses and 4.7 points of favorable reserve development. This compares with a 2014 combined ratio of 88.8% for full-year 2014, which included 2.2 points for catastrophe losses and 4.9 points of favorable reserve development. Alleghany continues to report reasonable underlying run-rate accident-year combined ratios normalized for average catastrophes in the mid-90s.
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 include continued favorable underwriting results in line with higher rated property/casualty (P/C) (re)insurer peers and enhanced competitive positioning into a larger market position and size/scale while maintaining strong profitability with low earnings volatility. In addition, the ratings of its subsidiary, RSUI, could be upgraded should Fitch consider the ratings core relative to Transatlantic and apply a single group IFS rating.
Fitch has upgraded the following ratings:
--$300 million 5.625% senior notes due Sept. 15, 2020 to 'BBB+' from 'BBB';
--$400 million 4.95% senior notes due June 27, 2022 to 'BBB+' from 'BBB';
--$300 million 4.9% senior notes due Sept. 15, 2044 to 'BBB+' from 'BBB'.
Fitch affirms the following ratings with a Stable Outlook:
--IDR at 'A-'.
Transatlantic Holdings, Inc.
--IDR at 'A-';
--$367 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'.
The Rating Outlook is Stable.