S&P Puts Allied World On CreditWatch Negative after Darwin Deal

July 2, 2008

Standard & Poor’s Ratings Services has placed its ‘BBB’ counterparty credit rating on Bermuda-based Allied World Assurance Co. Holdings Ltd. (AWH) on CreditWatch with negative implications. S&P also placed its ‘A-‘ counterparty credit and financial strength ratings on AWH’s operating subsidiaries on CreditWatch with negative implications.

“The CreditWatch placement follows AWH’s recent announcement of its intention to acquire Delaware-based Darwin Professional Underwriters Inc.”, S&P explained (See IJ web -site – https://www.insurancejournal.com/news/national/2008/06/30/91483.htm).

“Although we believe AWH has sufficient capital to acquire Darwin and that the acquisition represents a source of diversification for AWH, we are concerned that the acquisition could increase the group’s risk profile by introducing a relatively new book of business and client profile into AWH, with Darwin’s gross writings expected to constitute about 18 percent of the combined companies’ gross premium writings in 2008,” explained S&P credit analyst Laline Carvalho.

S&P added: “Darwin typically focuses on offering professional liability coverages to smaller clients, while AWH has traditionally focused on larger clients. In addition, although Darwin has reported relatively good operating results in the past three years, Standard & Poor’s believes the company’s book of business is relatively young and untested over a softening cycle due to its formation in March of 2003 and significant rate of growth since inception.”

In addition S&P noted that “many professional liability lines of business have had double-digit premium rate decreases over the past two years (albeit from relatively high levels) and similar to other property/casualty lines of business in the U.S., we expect them to experience further softening through the remainder of 2008 and into 2009.”

The rating agency is scheduled to meet with the management teams of both companies within the next few weeks. It plans to “discuss in greater detail Darwin’s book of business and how the acquisition will change AWH’s risk profile, competitive position, and prospective earnings for the combined organization.”

S&P expects the CreditWatch to be resolved over the next 90 days. Potential outcomes include: “an affirmation of the ratings with a stable outlook, an affirmation with a negative outlook, or a downgrade of no greater than one-notch,” said S&P.

Source: Standard & Poor’s – www.standardandpoors.com

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