WR Berkley’s (WRB) $300 million notes were recently rated “a” by A.M. Best with a stable outlook and “BBB+” by Fitch with a negative outlook. The company will use proceeds from the notes issued on Sept. 9 for general corporate purposes, including the potential buyback of common stock and repayment of debt. Such debt may include its $150 million of 5.125% senior notes, due on Sept. 30, 2010.

A.M. Best’s rating reflects the company’s unadjusted capital-to-debt ratio, which stood at 27.9% as of June 30. After this issue and the expected repayment of the $150 million debt, this ratio will be approximately 30% levels. The rating agency views this average debt in Berkley’s capital structure as a limiting factor.

Fitch’s negative outlook takes into account Berkley’s equity adjusted debt-to-total capital ratio which was about 24% till June 30. This would rise to the high 30% level after this issue. If management uses the rest of the amount for share repurchases, the debt-to-capitalization ratio would remain below 30%, which is Fitch’s benchmark level for a normal rating between a holding company’s senior debt and Issuer Default Rating.

However, if Berkley’s debt-to-capital ratio trends above 30%, Fitch would downgrade its rating by one notch, reflecting a negative outlook. The interest-coverage ratio, which was 9.1X at the year end 2008, would also shrink to mid-single digits after this issue.

Fitch currently rates Berkley’s Issuer Default Rating at ‘A-’ and Insurer Financial Strength at ‘A’, with a negative outlook. Both rating agencies acknowledge management’s prudent catastrophe risk management, product mix diversity and disciplined underwriting culture. The company’s disciplined underwriting culture and conservative investment philosophy have led to book value growth. However, Berkley’s combined ratio has increased to 93.1% in 2008 from 88.1% in 2007. Fitch expects the combined ratio to trend higher in the near term.

Read the full analyst report on “WRB”
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