S&P Revises Outlook on Allied World to Positive; Affirms Current Ratings

Standard & Poor’s Ratings Services has revised its outlook on Allied World Assurance Co. Holdings Ltd. (AWH) and its operating subsidiaries to positive from stable. S&P also affirmed all of its ratings on AWH, including the ‘BBB’ counterparty credit rating, as well as the ‘A-‘ counterparty credit and financial strength ratings on the core operating companies.

“We revised the outlook to positive based on the company’s strong financial profile, which encompasses a track record of strong operating results since inception, with an average combined ratio of 90 percent and a return on revenue of 23 percent from 2002 to 2009, as well as strong investments and capitalization for the rating,” explained credit analyst Tracy Dolin.

S&P also said it believes that Allied World’s competitive position “likely will strengthen over the next 12 to 18 months as it continues to build a brand name in the small regional accounts business, particularly health care writings, and opportunistically grows its global reinsurance and international writings–the latter boosted by its newly established Lloyd’s syndicate.

“Although AWH’s focus on casualty writings makes the company more susceptible to pricing and inflationary pressures given our view that current favorable claims-frequency trends are unsustainable, the company’s robust price monitoring and reserving practices lessen these concerns.”

S&P said its ratings on AWH reflect the subsidiaries’ “strong competitive position, strong operating performance since inception, and strong capitalization, supported by extremely strong capital adequacy. Partially offsetting these strengths are soft pricing that remains in casualty lines, as well as our belief that the reduction in loss costs and frequency in these lines is unsustainable.

“Although we view Allied World’s reserving approach as conservative, its short operating history and consequently limited internal loss experience make its reserve adequacy less certain. We also believe that the company’s appetite for growth and expansion, even amid soft market conditions, could contribute to further significant shifts in its risk profile.”

The rating agency explained that the positive outlook “signifies the possibility that we could raise the ratings on Allied World by one notch over the next 12 to 24 months. Factors that would contribute to an upgrade include a continuation of the group’s strong earnings generation, both on a calendar-year and underwriting-year basis, and its ability to meet the expectations noted above.

“If Allied World does not meet our expectations, if operating results deteriorate significantly in the absence of reserve releases, or if the company’s risk profile changes materially without sufficient risk-management controls in place, we could revise the outlook to stable over the outlook horizon (12 to 24 months).”

Source: Standard & Poor’s