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Rating Action:

Moody's downgrades Allied World's ratings following acquisition by Fairfax; outlook is stable

10 Jul 2017

New York, July 10, 2017 -- Moody's Investors Service, ("Moody's") has downgraded the ratings of Allied World Assurance Company Holdings, AG (Allied World; NYSE: AWH) including the senior debt rating for Allied World Assurance Company Holdings, Ltd. to Baa2 from Baa1, and the insurance financial strength (IFS) rating of Allied World's insurance subsidiaries to A3 from A2. The rating action follows Fairfax Financial Holdings Limited's (Fairfax; TSX: FFH, Baa3 senior debt, stable) announcement that it has completed the acquisition of Allied World. This action concludes a review for downgrade that was initiative on 21 December 2016. Please see list of all rating actions below. The outlook for the ratings is stable.

RATINGS RATIONALE

According to Moody's, the downgrade reflects our expectation that Fairfax will likely increase Allied World's investment risk over time, which will add volatility to the company's earnings. Allied World's capitalization is also lower as a result of $438 million of dividends paid by Allied World as part of the transaction. However, Moody's recognizes that the acquisition will bring strategic benefits for Allied World, as it is now part of a larger, more diversified organization with significant holding company liquidity.

The rating agency said Allied World's ratings reflect the company's well diversified mix of specialty insurance businesses with expertise in niche markets, historically solid and stable operating returns, and relatively manageable catastrophe risk. Approximately 77% of its premiums come from insurance rather than reinsurance, making it less susceptible to current pressures in the reinsurance sector compared to many of its Bermudian peers. Nevertheless, reinsurance still accounts for most of the company's underwriting profits.

Allied World's strengths are offset by exposure to specialty lines of business which inherently carry more risk compared to conventional insurance lines as well as exposure to long tail casualty lines which are more susceptible to reserve volatility, medical inflation and changes in the legal environment. In addition, the company has reported weak profitability in its Global Markets Insurance segment given heightened competition in its Lloyd's business coupled with a high expense ratio as it builds scale in the segment. Allied World also carries somewhat higher operational leverage compared to similarly rated peers.

The two notch spread between Allied World's A3 IFS rating and the Baa2 senior debt rating reflects standard notching for insurance groups that maintain the majority of assets in Bermuda as well as implicit support by Fairfax. Fairfax's Baa3 senior unsecured debt rating is one notch below that of Allied World reflecting partial structural subordination relative to Allied World's senior unsecured obligations.

RATING DRIVERS

Factors that could lead to an upgrade of the ratings include: 1) gross underwriting leverage consistently below 2.5x; 2) maintaining profitability at levels above peers to compensate for a potentially higher risk investment strategy; 3) adjusted financial leverage at Fairfax consistently below 25% and earnings coverage (excluding realized gains/losses) consistently above 5x.

Factors that could lead to a downgrade of the ratings: 1) a decline in shareholders' equity (including dividends) of more than 10% over a rolling twelve month period; 2) material reserve increases for prior accident years; 3) modeled loss for a single 250-year catastrophe event for a single zone, whether natural or man-made, exceeds 20% of equity; 4) adjusted financial leverage/total leverage rises above 35% and fixed charge coverage drops below 3x at Fairfax level.

The following ratings have been downgraded:

Allied World Assurance Company Holdings, Ltd -- backed senior debt to Baa2 from Baa1; backed provisional senior unsecured to (P)Baa2 from (P)Baa1; backed provisional subordinated to (P)Baa3 from (P)Baa2;

Allied World Assurance Company, Ltd -- insurance financial strength to A3 from A2;

Allied World Assurance Company (U.S.) Inc. -- insurance financial strength to A3 from A2;

Allied World National Assurance Company -- insurance financial strength at to A3 from A2; and

Allied World Insurance Company -- insurance financial strength at to A3 from A2.

The principal methodology used in these ratings was Global Reinsurers published in April 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Allied World Assurance Company Holdings, AG is a Swiss holding company whose subsidiaries write non-life insurance and reinsurance from hubs in Bermuda, US, Ireland, Asia, London and Switzerland. For the first three months of 2017, the company reported gross premiums written of $861 million, net premiums written of $676 million, and net income of $80.3 million. As of 31 March 2017, total shareholders' equity was $3.6 billion.

Headquartered in Toronto, Canada, Fairfax Financial Holdings Limited is a holding company whose main subsidiaries are engaged in property and casualty insurance and reinsurance and investment management. For the first three months of 2017, Fairfax reported gross premiums written of $2.6 billion, net premiums written of $2.3 billion and net earnings attributable to shareholders of $82.6 million. As of 31 March 2017, common shareholder's equity was $8.3 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jasper Cooper, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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