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Rating Action:

Moody's reviews Allied World's ratings for downgrade based on planned acquisition by Fairfax

21 Dec 2016

New York, December 21, 2016 -- Moody's Investors Service has placed the ratings of Allied World Assurance Company Holdings, AG (Allied World; NYSE: AWH) including the Baa1 senior debt rating for Allied World Assurance Company Holdings, Ltd. and the A2 insurance financial strength (IFS) rating of Allied World's insurance subsidiaries on review for possible downgrade following the company's announcement that it has entered into an agreement to be acquired by Fairfax Financial Holdings Limited (Fairfax; TSX: FFH, Baa3 senior debt, stable) for USD 4.9 billion. Fairfax is funding the transaction with cash and stock including approximately $450 million of dividends from Allied World's retained earnings. The transaction is expected to close in the first half of 2017, and is subject to customary closing conditions and regulatory approvals.

RATINGS RATIONALE

The review for possible downgrade of Allied World's ratings is prompted by Fairfax's lower credit profile, an expectation that Fairfax would likely, over time, increase Allied World's investment risk, and somewhat reduced capital as a result of approximately $450 million of dividends to be paid by Allied World to shareholders as part of the transaction. However, Allied World would be part of a larger more diversified organization with significant holding company liquidity. The review will focus on Allied World's prospective profitability, operational flexibility, and capital adequacy.

According to Moody's, 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, moderate financial leverage and relatively manageable catastrophe risk. About 70% of its gross 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 the company's focus on specialty lines of business which inherently carry more risk compared to standard 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.

RATING DRIVERS

Allied World's ratings could be downgraded upon closing of the transaction given the potential for higher investment risk and somewhat lower capitalization. Given Fairfax ownership and structural considerations, the spread between the IFS and senior debt ratings could also be widened to the more typical three notch spread.

Additional factors that could lead to a downgrade of the ratings: 1) sustained debt-to-capital ratio above 25%; 2) EBIT fixed charge coverage below 6x in consecutive years; 3) decline in shareholders' equity (including dividends and share repurchases) of more than 10% over a rolling twelve month period; 4) material reserve increases for prior accident years; and, 5) modeled loss for a single 250-year catastrophe event for a single zone, whether natural or man-made, exceeds 20% of equity.

A termination of the planned transaction, with no material change to Allied World's current financial profile would most likely result in a confirmation of the current ratings with a stable outlook.

The following ratings have been placed on review for downgrade:

Allied World Assurance Company Holdings, Ltd -- senior debt at Baa1; provisional senior unsecured at (P)Baa1; provisional subordinated at (P)Baa2;

Allied World Assurance Company, Ltd -- insurance financial strength at A2;

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

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

Allied World Insurance Company -- insurance financial strength at 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 nine months of 2016, the company reported gross premiums written of $2.4 billion, net premiums written of $1.8 billion, and net income of $296 million. As of 30 September 2016, total shareholders' equity was $3.6 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: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

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

No Related Data.
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