After Fairfax acquisition: Allied World set on ‘CreditWatch Negative’ and ‘under review with negative implications’

S&P Global Ratings has placed Switzerland-based Allied World on CreditWatch with negative implications and AM Best has placed it under review with negative implications after the global specialty and property/casualty insurer agreed to a $4.9 billion acquisition by Canada’s Fairfax.

Fairfax Financial Holdings, a property and casualty re/insurer, is acquiring Allied World Assurance Company Holdings for $4.9 billion in cash and stock as the two companies have entered into a merger agreement approved by their boards.

As a consequence, S&P placed all of its ratings on Allied World Assurance and its operating companies on CreditWatch with negative implications. The ratings agency argued that as with other Fairfax re/insurance subsidiaries, Allied World would continue to operate independently — with no anticipated revenue or expense synergies. In addition, Allied Word's executives have not entered into any long-term contracts to remain employed with the company, which S&P deems a strongly performing re/insurance group. Therefore, the potential departure of Allied World's key executives after the transaction closes is a negative rating

As with any major acquisition, there are inherent integration and execution risks, S&P added. Allied World will continue to be operated in a decentralized manner by its existing management team, which could create cultural challenges as it integrates Fairfax. Furthermore, although S&P views Allied World's enterprise risk management (ERM) as strong, it views Fairfax's ERM as adequate, which could weaken the ratings agency’s view of Allied World's ERM construct under Fairfax's ownership. This could happen especially if there were significant changes to Allied World's risk profile after the acquisition closes. S&P does, for example, believe that Allied World will likely shift its investment strategy to align it with Fairfax's.

After the transaction closes, which is expected for the first half of 2017, S&P will likely lower the counterparty credit and financial strength ratings on Allied World by one notch to 'A-' to align them with those on Fairfax's core operating subsidiaries.

Similarly, A.M. Best has placed under review with negative implications the financial strength rating of A (Excellent) of Allied World Assurance Company and its operating subsidiaries.

The ‘under review with negative implications’ status reflects the execution risks associated with the transaction and the variation between Fairfax’s and Allied World’s credit ratings, AM Best explained. This status also reflects the risks to Allied World’s ratings should the transaction not close as planned. The closing is subject to regulatory and shareholder approvals and other customary closing conditions.