S&P Lowers Alleghany Ratings to ‘BBB’; An ‘Arbitrary’ Decision Says CEO

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit rating on Alleghany Corp. by one notch to ‘BBB’ from ‘BBB+’ and assigned a stable outlook.

“We lowered the rating because we believe Alleghany increasingly resembles a traditional insurance holding company,” explained S&P credit analyst John Iten. “This reduces the justification for nonstandard notching under our group methodology for financial services companies.”

The decision met with a quick response from Alleghany’s President and CEO, Weston M. Hicks, who indicated he was “surprised and perplexed by S&P’s decision to lower its unsolicited counterparty credit rating of Alleghany.” He added that the decision had been made “without the benefit of any information being provided by Alleghany to S&P or discussions between S&P and Alleghany.

“I believe,” Hicks continued, “that the decision is entirely arbitrary and in no way reflects any change in Alleghany’ s condition. Alleghany continues to maintain an amount of capital that is significantly in excess of its fixed contractual obligations.”

The rating announcement took no issue with Hicks, acknowledging that the rating change had not been solicited by the Company, but was “initiated by Standard & Poor’s.” In addition S&P pointed out that the change “may be based solely on publicly available information and may or may not involve the participation of the issuer’s management.” As a caveat S&P added that it has used information from sources believed to be reliable, but “does not guarantee the accuracy, adequacy, or completeness of any information used.”

S&P explained that with the sale of World Minerals Inc. in 2005, Alleghany’s “primary operating subsidiaries were all in the property/casualty insurance segment. Since then, Alleghany has steadily increased its concentration in the property/casualty business. Normally, insurance holding company ratings are three notches below that of the insurance subsidiaries.”

The rating action “increases the gap between the counterparty credit rating on Alleghany and its primary insurance subsidiary, RSUI Indemnity Co., to two notches from one notch,” S&P added. “Alleghany continues to benefit from nonstandard notching, reflecting the holding company’s historically conservative use of financial leverage and the large holding of liquid securities at the parent-company level.”

S&P also indicated that it has based its rating on Alleghany “on the good competitive position of its insurance subsidiaries in specialty property/casualty lines, strong operating performance, strong financial flexibility, and low financial leverage. Partially offsetting rating factors are the high levels of catastrophe exposure and dependence on reinsurance to control this exposure, primarily at RSUI Indemnity Co., and the above-average concentration risk the company takes in its equity investment portfolios, both at the holding company and at RSUI.”

Overall S&P acknowledged that it expects the Group’s “earnings will be strong in 2008, largely reflecting continued strong earnings at RSUI (assuming average catastrophe activity). Financial leverage should remain conservative.” The analysis added, however that Alleghany, through RSUI, “is materially exposed to U.S. earthquake and windstorm risk,” which could result in “earnings volatility from natural catastrophes. However, this has been mitigated somewhat by improved property/catastrophe risk management at RSUI.”

Sources: Standard & Poor’s – www.standardandpoors.com; Alleghany Corporation – http://www.alleghany.com