Rating Action on Allied World

Fitch Ratings provided Issuer Default Rating (“IDR”) 'A' and Senior debt 'A-' to Allied World Assurance Company Holdings, Ltd. ( AWH - Snapshot Report ) . Concurrently, the rating agency provided Insurer Financial Strength (“IFS”) to its property/casualty and reinsurance subsidiaries. The ratings carry a stable outlook.

The ratings account for sustained solid underwriting results, strong capitalization, superb reserve position and superior investment portfolio.

The company had lower combined ratio in the past two quarters due to lower catastrophes when compared with the year-ago level. Allied World’s lion’s share in premium comes from commercial liability lines business. Commercial reinsurance business represents one third of the company's premium.

Fitch noted that over the last five years, Allied World’s net premiums written to total shareholders' equity averaged 0.46x. The company also has lower financial leverage with debt representing 19.6% of capital as on June 30, 2012. Additionally, shareholders' equity increased by 4.3%.

The rating agency also noted that higher yielding alternative investments and equity securities comprises less than 15% of the total invested assets.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. On the other hand, rating downgrade adversely affects the business, besides increasing cost of future debt issuances. We believe strong scorings with rating agencies will help it write more business going forward.

Ratings could be revised upward if Allied World continues to post solid underwriting results, substantially improves financial metrics, solidifies competitive position, minimizes earnings instability and delivers solid profitability.

However, ratings will be subject to downgrade if capital erodes, lags peers in terms of underwriting results or experiences considerable adverse loss reserve development. Also, if underwriting leverage moves ahead of 1.0x net written premiums-to-equity ratio, financial leverage moves beyond 25% or incurs massive catastrophe loss.

We retain our Neutral recommendation on Allied World Assurance Company. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates upward boost on the shares over the near term. ACE Limited ( ACE - Analyst Report ) , which closely competes with Allied World carries a Zacks #3 Rank (short term Hold rating) while Endurance Specialty Holdings Ltd. ( ENH - Snapshot Report ) carries a Zacks #4 Rank (short term Sell rating).