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Fitch Affirms Alleghany and Subsidiaries' Ratings; Outlook Stable
August 28, 2017 / 8:04 PM / 3 months ago

Fitch Affirms Alleghany and Subsidiaries' Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, August 28 (Fitch) Fitch Ratings has affirmed the ratings for Alleghany Corporation (Alleghany) as follows: --Issuer Default Rating (IDR) at 'A-'; --Senior debt at 'BBB+'. Fitch has also affirmed the ratings for 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+' (Strong) Insurer Financial Strength (IFS) rating for Transatlantic's property/casualty reinsurance subsidiaries and the 'A' (Strong) IFS rating for RSUI Group, Inc.'s (RSUI) property/casualty insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS Fitch's affirmation of Alleghany's ratings reflects the company's strong business profile, strong earnings, very strong capitalization, modest financial leverage, strong fixed charge coverage, and favorable financial flexibility. These positive factors are partially offset by exposure to possible adverse reserve development due to the relatively large portion of loss reserves related to casualty lines as well as Fitch's negative sector outlooks on global reinsurance and U.S. property/casualty (P/C) insurance. Fitch considers Alleghany to have a strong reinsurance business profile through its Transatlantic operations, which accounted for 78% ($4 billion) of total company net premiums written (NPW) in 2016. In addition, Transatlantic has a five-year agreement in place with General Reinsurance Corporation (GenRe) under which Transatlantic acts as the exclusive underwriting manager on behalf of GenRe for U.S. and Canadian broker market treaty reinsurance business written on and after Aug. 1, 2016. This partnership favorably expands Transatlantic's reinsurance business opportunities and adds fee income for managing the underwriting and liabilities. Alleghany also has a smaller specialty P/C insurance segment operation that is conducted primarily through RSUI. Fitch views RSUI as having a strong insurance business profile, writing $0.7 billion of Alleghany's $1.1 billion of insurance segment NPW in 2016. Fitch views Alleghany's financial performance and earnings as strong. The company posted net income of $251 million through the first six months of 2017, compared with $232 million in the first six months of 2016 and $457 million for full-year 2016. These 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. Transatlantic posted a combined ratio of 93.9% for the first six months of 2017, which included no catastrophe losses and 4.8 points of favorable reserve development. This is down from 94.4% for the first six months of 2016, which included 5.0 points of catastrophe losses and 7.7 points of reserve releases. The lower level of reserve development reflects a $24.4 million (1.3 points) reserve charge on UK casualty business from the cut in the Ogden discount rate. RSUI posted a combined ratio of 78.2% for the first six months of 2017, which included 3.7 points of catastrophe losses and 5.2 points of favorable reserve development. This compares with a six-month 2016 combined of 79.4%, which included 7.6 points for catastrophes and 6.3 points of prior-year reserve releases. Fitch believes Alleghany has very strong capitalization with GAAP NPW to total shareholders' equity of about 0.6x, and statutory NPW to policyholders' surplus in 2016 of approximately 0.7x in its reinsurance operations and 0.6x in its insurance operations, including 0.5x at RSUI. Total GAAP stockholders' equity of $8.4 billion at June 30, 2017 is up 6% from $7.9 billion at Dec. 31, 2016, due to continued net income and an increase in unrealized gains on debt and equity securities, with no share repurchases. Alleghany's financial leverage ratio was very reasonable for the rating category at 14.0% as of June 30, 2017, down slightly from 15.6% at Dec. 31, 2016 due to strong shareholders' equity growth. Fixed-charge coverage was strong at 7.8x in the first six months of 2017, 8.7x in full-year 2016 and 8.4x in 2015 as recent catastrophe losses have been manageable. Fitch expects Alleghany to maintain coverage levels of at least 7x. Alleghany maintained a beneficial amount of holding company cash and marketable securities of $1.1 billion at June 30, 2017. Fitch believes this resource provides the company with an additional cushion in meeting potential operating subsidiary company cash flow shortages and liquidity to service its debt. RATING SENSITIVITIES Key rating sensitivities that could result in a downgrade include deterioration in reinsurance sector fundamentals that Fitch views as weakening Alleghany's competitive position, business profile or overall profitability as demonstrated by sustained combined ratios above 100% for reinsurance operations or significant adverse loss reserve development. In addition, 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; or a substantial decline in the holding company's cash position could lead to a downgrade. Key rating sensitivities 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 very strong business profile 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. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings with a Stable Outlook: Alleghany Corporation --Long-term 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+'; --$300 million 4.9% senior notes due Sept. 15, 2044 at 'BBB+'. Transatlantic Holdings, Inc. --Long-term IDR at 'A-'; --$350 million 8% 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 Christopher A. Grimes, CFA Director +1-312-368-3263 Committee Chairperson Donald F. 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