S&P cuts Allied World post acquisition by Fairfax

S&P Global Ratings has lowered the ratings on Switzerland-based Allied World which has been acquired by Canada-based Fairfax.

Fairfax, a property/casualty re/insurer, has closed the $4.9billion acquisition of Allied World, a provider of property, casualty and specialty re/insurance solutions on July 6.

As a result of the transaction, S&P has lowered its ratings on Allied World, aligning them with those on Fairfax, and warning on execution risks.

The ratings agency reduced its long-term counterparty credit and senior debt ratings on Allied World Assurance Co. Holdings AG to 'BBB-' from 'BBB+'. At the same time, S&P lowered its counterparty credit and financial strength ratings on Allied World's operating companies to 'A-' from 'A'. The outlook on all these companies is stable.

The move was driven by S&P’s view that Allied World is now a strategically important entity to Fairfax based on its material size and strategic fit within the expanded group. The acquisition of Allied World brings a strongly performing re/insurance group under the Fairfax umbrella, but as with other Fairfax re/insurance subsidiaries, Allied World will continue to operate independently, with no anticipated revenue or expense synergies.

Based on operating results as of March 31, 2017, Allied World would have materially contributed about 24 percent to the pro forma merged entity's gross premiums written as well as about 23 percent to the consolidated shareholders' equity. In addition, the new group will become the fifth-largest US excess and surplus writer.

As with any major acquisition, there are inherent integration and execution risks. Allied World will continue to be operated in a decentralized manner by its existing management team, which could create cultural challenges as it integrates with Fairfax. In addition, Allied Word's executives have not entered into any long-term contracts to remain employed with the company. Therefore, the potential abrupt departure of Allied World's key executives, with no clear succession plans, could be viewed as a negative rating factor. Furthermore, although S&P views Allied World's enterprise risk management (ERM) as strong, we view Fairfax's ERM as adequate, which could weaken our view of Allied World's ERM under Fairfax's ownership. This could happen especially if there were significant changes to Allied World's risk profile, according to S&P. Analysts believe Allied World will likely shift its investment strategy to align it with Fairfax's. However, they expect both companies' executives to overcome the potential challenges given the depth and breadth of their experience.

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