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A.M. Best Affirms Ratings of W. R. Berkley Corporation and Its Subsidiaries; Assigns Rating to Subordinated Debentures

WRB | May 9, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of Berkley Insurance Company (BIC) (Wilmington, DE) and 24 of its reinsured subsidiaries and affiliates, collectively referred to as W. R. Berkley Insurance Group.

A.M. Best has also affirmed the ICR and debt ratings of “a-” on senior unsecured notes and “bbb” on trust preferred securities issued by W. R. Berkley Corporation (W. R. Berkley) (Greenwich, CT) [NYSE: WRB]. Concurrently, A.M. Best has assigned a debt rating of “bbb+” to the $350 million 5.625% subordinated debentures due 2053 issued by W. R. Berkley. The outlook for all ratings is stable. (See link below for a detailed list of the companies and ratings.)

The rating affirmations of the members of W. R. Berkley Insurance Group follow W. R. Berkley’s first quarter 2013 earnings release and take into consideration the reinsurance pooling agreement that was executed and made effective January 1, 2013 between BIC and 19 of the 24 aforementioned subsidiaries of BIC. Four of BIC’s domestic subsidiaries, which are not part of the pooling agreement, have in place separate 100% quota share reinsurance agreements with BIC, effective January 1, 2013. The ratings of Queen’s Island Insurance Company, Ltd. (Hamilton, Bermuda) largely reflect the explicit support provided by BIC in the form of an aggregate stop loss reinsurance contract and a net worth maintenance agreement with W. R. Berkley.

The rating affirmations for W. R. Berkley Insurance Group reflect its historically favorable underwriting and operating performance, well-established market profile and solid risk-adjusted capitalization. Good liquidity, positive operating cash flow, considerable business diversification, in addition to better than average catastrophe exposure, were notable rating considerations as well. A.M. Best believes the favorable performance is largely owed to successfully executed, well-developed business strategies, which feature individual operating units focused on specific niche markets, primarily defined by geography, product orientation and distribution channel. Partially offsetting these positive rating factors are the effects of weak macroeconomic conditions, competitive market pressures impacting both the surplus lines and specialty commercial markets, and declining investment yields. These ratings also recognize the favorable prior year loss reserve development reported in recent years and the earnings garnering from these redundancies.

Through March 31, 2013, W. R. Berkley reported pretax income of $160.2 million and net income of $116.6 million while generating a 10.8% return on equity. Both income figures represented a slight decline year-over-year but still reflected highly profitable operations. The company’s consolidated financial leverage measured on an unadjusted debt-to-capital basis (including trust preferred securities) stood at 31%. W. R. Berkley’s financial leverage is expected to remain virtually unchanged through the second quarter of the year, contemplating both the issuance of the new 5.625% subordinated debentures and the expected May 26, 2013 redemption of the outstanding 6.75% trust originated preferred securities of W. R. Berkley Capital Trust II.

A.M. Best expects W. R. Berkley’s earnings to remain strong, with both its cash coverage ratios and financial leverage remaining supportive of its ratings as well. A.M. Best will continue to closely monitor both measures, particularly financial leverage, to ensure that all remain in line with A.M. Best’s expectations.

Potential upward movement in the ratings is unlikely, but a favorable change in the ratings outlook could possibly occur over the long term if the group exhibits notably enhanced operating results through market cycles, remains steadfast in maintaining a conservative reserve posture (absent adverse development), and can sustain growth in earnings that will ultimately lead to strengthened risk-adjusted capitalization and improve financial leverage. On the other hand, possible negative pressure on the ratings could result from significant adverse reserve development, material deterioration in risk-adjusted capitalization, increased financial leverage, and notable shortfalls in operating results and/or critical impediments to future earnings prospects.

For a complete listing of W. R. Berkley Insurance Group’s FSRs, ICRs and debt ratings, please visit www.ambest.com/press/050903wrberkley.pdf.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.