A.M. Best Affirms AWH Ratings

Yesterday, the issuer credit rating (ICR) of Allied World Assurance Company Holdings AG ( AWH - Snapshot Report ) was affirmed at “bbb” by A.M. Best Co. Additionally, the financial strength rating (FSR) and ICR of subsidiary Allied World Assurance Company Ltd (Allied Assurance) and its operating subsidiaries were affirmed by the rating agency at “A” and “a”, respectively.

While the FSR carries a stable outlook, the ICR of Allied Assurance has a positive outlook indicating high chances of an upward revision in the near term. Further, A.M. Best affirmed the ICR of Allied World Assurance Company Holdings Ltd (Allied World Holdings Bermuda) and debt ratings on $500 million 7.5% senior unsecured notes due 2016 and $300 million 5.5% senior unsecured notes due 2020 at “bbb” with a positive outlook.

The affirmation of Allied Assurance’s ratings is based on its broad business mix, impressive risk-adjusted capitalization and veteran management. Moreover, the sturdy operating results, efficient risk management and strategic expansions (geographically, product-wise and in terms of distribution channel) have resulted in the positive outlook on the ICR. While these positive attributes demonstrate the successful implementation of the company’s business plans, they are somewhat offset by the company’s focus on the casualty business, which is suffering from soft pricing. Nevertheless, this negative factor also has a silver lining since it protects the company from substantial exposure to catastrophes.

However, in case Allied Assurance’s loss reserves fall short of the required level and the sustained low interest rates lead to a fall in investment income, A.M. Best can revise its positive outlook on the ratings. Conversely, in case the company’s operating results continue to improve, the rating agency can revise the FSR upwards even if it carries a stable outlook, indicating low probability of a revision in the near term.

Last month, A.M. Best reiterated the ICR of Allied World’s peer in the property and casualty insurance business – XL Group plc ( XL - Analyst Report ) – at “bbb”. Concurrently, the rating agency reiterated the FSR at “A” (Excellent) and ICR at “a” of the property/casualty subsidiaries of the company.

Allied World carries a Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term ‘Neutral’ recommendation on the stock.