Fitch Assigns ‘BBB’ Senior Debt Rating to Alleghany and ‘A+’ IFS Rating to Transatlantic [Manufacturing Close – Up]

Fitch Ratings has assigned ratings to Alleghany Corp. (Alleghany) as follows:

--Issuer Default Rating (IDR) at 'A-';

--Senior debt at 'BBB'.

Fitch has also assigned ratings to Transatlantic Holdings, Inc. (Transatlantic) as follows:

--IDR at 'A-';

--Senior debt at 'BBB+'.

In addition, Fitch has assigned an 'A+' Insurer Financial Strength (IFS) rating to Transatlantic's property/casualty reinsurance subsidiaries and an 'A' IFS rating to RSUI Group, Inc.'s (RSUI) property/casualty insurance subsidiaries. A full rating list is shown below. The Rating Outlook is Stable.

Fitch's rating rationale for the assignment of Alleghany's ratings reflects the company's conservative capitalization, reasonable financial leverage, sizable cash position and favorable financial flexibility. The ratings also reflect operating challenges in the highly competitive, property/casualty (re)insurance market, integration risk with the recent acquisition of Transatlantic and potential exposure to adverse reserve development on sizable casualty reserves.

Alleghany's recent acquisition of Transatlantic has significantly transformed the company from a modest, somewhat narrow focused property/casualty specialty insurance company into a sizable, more diversified property/casualty specialty (re)insurance entity. Fitch considers Transatlantic to have a favorable competitive position, as a leading global property/casualty reinsurer with a liability focus. Alleghany's position in specialty insurance is more modest, led by RSUI.

Fitch believes that Alleghany utilizes a reasonable amount of operating leverage comparable to (re)insurer peers, with net premiums written to total shareholders' equity expected at about 0.8x in 2012, including a full year of Transatlantic premiums. Favorably, Alleghany's total GAAP stockholders' equity grew by over $3.3 billion in the first half of 2012 to $6.3 billion at June 30, due to the merger with Transatlantic.

Alleghany's financial leverage ratio (adjusted for unrealized net gains on fixed-income investments) was 22.9 percent at June 30, which Fitch considers reasonable for the rating category. This level is up from 9.5 percent at Dec. 31, 2011, reflecting an additional $1.1 billion (fair value) of debt from the Transatlantic acquisition and $400 million of senior notes issued by Alleghany in June 2012.

Operating earnings-based interest coverage (excluding net realized capital gains/losses, other than temporary impairment losses and gain on bargain purchase) was consistently at mid-single digit levels in recent periods as interest expense has increased with additional debt and operating earnings have been challenged by higher catastrophe losses, weaker investment results and higher corporate administration expenses related to the merger. Going forward, annual interest expense requirements for Alleghany are anticipated to be just over $100 million, with Fitch expecting the company to maintain coverage levels of at least 7x.

Alleghany maintains a beneficial amount of holding company cash and marketable securities of $914 million at June 30. Fitch believes that this resource provides the company an additional favorable cushion in meeting potential operating subsidiary company cash flow shortages and liquidity to service its debt.

Fitch views Alleghany's exposure to potential adverse development as being higher than the exposures of companies that focus more on property business because the duration on casualty reserves is comparatively long. However, Fitch notes that this risk appears to have been conservatively managed, supported by the fact that Alleghany's loss reserves have consistently developed favorably.

Key rating triggers that could result in a downgrade include significant adverse loss reserve development, movement to materially below-average underwriting or operating performance, sizable deterioration in insurance subsidiary capitalization that caused net written premiums-to-equity ratio to exceed 1.0x, financial leverage maintained above 25 percent, run-rate operating earnings-based interest and preferred dividend coverage of less than 7x, significant acquisitions that reduce the company's financial flexibility and a substantial decline in the holding company's cash position.

Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results in line with higher rated property/casualty (re)insurer peers; material improvement in key financial metrics (e.g. net premiums written to equity) to more overcapitalized levels; and enhanced competitive positioning, while maintaining strong profitability with low earnings volatility. In addition, the ratings of RSUI could be upgraded over time should Fitch consider the ratings core relative to the ratings of Transatlantic.

Fitch assigns the following ratings with a Stable Outlook:

Alleghany Corp.

--IDR at 'A-';

--$300 million 5.625 percent senior notes due Sept. 15, 2020 at 'BBB';

--$400 million 4.95 percent senior notes due June 27, 2022 at 'BBB'.

Transatlantic Holdings, Inc.

--IDR at 'A-';

--$667 million 5.75 percent senior notes due Dec. 14, 2015 at 'BBB+';

--$350 million 8.00 percent senior notes due Nov. 30, 2039 at 'BBB+'.

Transatlantic Reinsurance Company

Fair American Insurance and Reinsurance Company

--IFS at 'A+'.

RSUI Indemnity Company

Covington Specialty Insurance Company

Landmark American Insurance Company

--IFS at 'A'.

Additional information is available at 'fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=651018

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