Fitch Ratings put W. R. Berkley Corporation’s ratings on Rating Watch Negative, particularly the company’s existing senior and subordinated debt ratings. A “BBB-” rating was also issued for the insurer’s $290 million issuance of subordinated notes maturing in 2056.
On the other hand, Berkley's property/casualty operating subsidiaries' Insurer Financial Strength (IFS) ratings were put under Stable Outlook.
The credit rating agency placed Berkley’s holding company ratings on Negative Watch as it had anticipated an increase in financial leverage thanks to its issuance of $290 million of subordinated debentures.
According to Fitch’s reports, Berkley’s pro forma financial leverage ratio increased to 36.1% up from 33.4% as of March 31. The credit rating agency previously said that an increase in financial leverage above 35% could lead to a downgrade of all holding company ratings.
The insurer’s Issuer Default Rating was set at “A-”.
Berkley could face another downgrade if it does not show any improvement in its financial leverage over the next six to 12 months.
For the first quarter of 2016, the company’s operating interest coverage was 6.3x—an improvement from last year’s 5.6x. Fitch calculated pro forma interest coverage, accounting for new subordinated debentures, of 5.6x for the first quarter.
W.R. Berkley's operating subsidiaries' IFS ratings were put on Stable Outlook due to the insurer’s “favorable long-term financial results with solid statutory capitalization despite aggressive capital management, a strong underwriting culture with niche market positions in several lines, and modest exposure to catastrophe losses.” The underlined factors were partially offset by high financial leverage and reserve risk coming from long-tail casualty lines.
The company holds a medium market position and scale with net premiums written of $6.2 billion at Dec. 31, 2015 and shareholders' equity of $4.75 billion at March 31, 2016. Berkley’s broad portfolio that offers various sources of revenue, coupled with its flexibility to tout specific products during favorable market conditions, allow the company to avoid depending too much on any single product line.
The insurer demonstrated favorable GAAP underwriting results for the first quarter of 2016, with a 93.5% combined ratio following a full year 2015 combined ratio of 93.7%.