Bermuda-headquartered Allied World’s improved profitability and capitalisation has led Moody's Investors Service to upgrade the insurance financial strength (IFS) ratings of the company’s insurance operating subsidiaries (collectively, Allied World) to A2 from A3.

Moody’s has also affirmed the Baa2 senior debt rating of Allied World Assurance Company Holdings I, Ltd.

The rating outlook for Allied World is stable.

In explaining further its rationale, Moody's said the upgrade of Allied World's financial strength ratings reflected the group's significantly improved underwriting performance over the past several years, improved capital adequacy, and meaningful reduction in catastrophe exposures.

“Allied World maintains a diversified mix of specialty insurance and reinsurance businesses, which enables the company to opportunistically shift its business as underwriting cycles change.

“These strengths are tempered by the group's potential volatility from long-duration casualty reserves, significant earnings volatility due to catastrophe losses and exposure to high-risk investments as well as high financial leverage at parent company, Fairfax Financial.

“The affirmation of Allied World's senior debt rating reflects Moody's standard three notch differential between the A2 IFS rating and the Baa2 senior debt rating.

“Fairfax continues to provide implicit support to Allied World. However, Allied World's senior debt rating does not benefit from additional rating uplift.

“The stable outlook reflects our expectation that Allied World will maintain good underwriting discipline and solid capitalisation.

“For the first nine months of 2021, Allied World reported operating income of $238 million, compared with operating income of $218 million in the prior year period, largely driven by lower natural catastrophe losses compared with the prior year period.

“ The group's combined ratio improved to 94.5 per cent for the first nine months of 2021, down from 95.2 per cent in the prior year period.

Moody's expects Allied World's underlying combined ratio, which excludes catastrophes and reserve development, will remain strong as a result of “solid pricing increases as well as underwriting and expense discipline”.