Fitch Ratings Downgrades Atlantic Mutual; Places On Rtg Watch Neg.Business Editors
CHICAGO--(BUSINESS WIRE)--April 4, 2003
Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. has lowered the insurer financial strength ratings of the Atlantic Mutual Companies (AMC (Advanced Mezzanine Card) See AdvancedTCA. ) to 'BBB' from 'BBB+'. The individual companies affected are listed below. Fitch also downgraded the Atlantic Mutual Insurance Company surplus note rating to 'BB' from 'BB+'. All ratings have been placed on Rating Watch Negative.
In order to resolve the Rating Watch, Fitch plans to meet with AMC in the coming weeks to review AMC's current reserve adequacy, use of reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. and capital plans. Upon completion of the review the insurance and surplus note ratings will be either affirmed af·firm
v. af·firmed, af·firm·ing, af·firms
1. To declare positively or firmly; maintain to be true.
2. To support or uphold the validity of; confirm.
v.intr. at the current levels or reduced. However, Fitch does not expect that the insurance or surplus note ratings would be moved down by more than one additional notch (i.e., to no less than 'BBB-' and 'BB-', respectively).
The rating actions follow AMC's announcement of its 2002 earnings, and reflect Fitch's belief that AMC's balance sheet quality deteriorated during the year. Although AMC reported statutory net income of $17.7 million and an increase in surplus of $35 million in 2002, results continue to reflect adverse loss reserve development offset by increased use of financial reinsurance Financial Reinsurance, also known as 'fin re', is a form of reinsurance which is focused more on capital management than on risk transfer. In the non-life segment of the insurance industry this class of transactions is often referred to as finite reinsurance. arrangements and realized gains Realized Gain
A gain resulting from selling an asset at a price higher than the original purchase price.
There may be tax consequences for a realized profit. to produce current income.
AMC reported adverse reserve development of $99.7 million, or 23% of prior year surplus in 2002, which followed significant adverse development in 2001, 2000, and 1999. Fitch notes that AMC chose to release reserves in 2002 from the 2001 accident year, which raises some concerns given that the 2001 accident year is still relatively immature immature /im·ma·ture/ (im?ah-chldbomacr´) unripe or not fully developed.
Not fully grown or developed.
unripe or not fully developed. .
In addition, Fitch calculates AMC's three-year net asbestos survival ratio to be just 3.2 times (x), which falls far short of the 16x survival ratio Fitch considers to be adequate for the industry.
AMC's 2002 earnings and surplus were again affected by the company entering into significant financial reinsurance arrangements, which Fitch views as forms of borrowed capital. These arrangements provide benefits to surplus and/or earnings in the current year (in the form of ceding cede
tr.v. ced·ed, ced·ing, cedes
1. To surrender possession of, especially by treaty. See Synonyms at relinquish.
2. commissions paid to AMC or when AMC's ceded losses exceed its ceded premiums resulting in an underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. gain). However, these arrangements obligate obligate /ob·li·gate/ (ob´li-gat) pertaining to or characterized by the ability to survive only in a particular environment or to assume only a particular role, as an obligate anaerobe. AMC to credit reinsurance funds withheld accounts for investment income in subsequent years, thus reducing AMC's future income.
AMC has increased its reliance on such reinsurance over the past four years and, as a result, has increasingly encumbered Encumbered
A property owned by one party on which a second party reserves the right to make a valid claim, e.g., a bank's holding of a home mortgage encumbers property. its future earnings. Fitch notes that the interest credited to reinsurance funds withheld accounts consumed approximately half of AMC's investment income in 2002. Fitch also estimates that approximately one-half of AMC's surplus is comprised of 'borrowed' amounts, including both estimated financial reinsurance balances and surplus notes of $100 million.
Fitch also notes that AMC reported $12.9 million of realized gains in 2002, which were primarily generated through the sale of bonds. Interest rates are at historically low levels, which suggests that funds generated from such sales will be reinvested at lower rates. Thus, while such sales generate current income, Fitch believes such income comes at the detriment Any loss or harm to a person or property; relinquishment of a legal right, benefit, or something of value.
Detriment is most frequently applied to contract formation, since it is an essential element of consideration, which is a prerequisite of a legally enforceable contract. of future investment income.
Positively, Fitch notes that AMC continues to benefit from higher insurance prices and lower insured exposures. AMC has also continued to exit unprofitable lines and improve its business processes to lower expenses. However, Fitch believes there is some risk that AMC will be challenged in a competitive insurance marketplace and may not benefit as much from the current hard market conditions as other companies.
Entity/Issue/Type Action Rating Atlantic Mutual Insurance Company -- Insurer financial strength Downgrade 'BBB'; -- Surplus note Downgrade 'BB'; -- Rating Watch Place on Negative. Centennial Insurance Company Atlantic Lloyd's Insurance Company of Texas Atlantic Specialty Insurance Company -- Insurer financial strength Downgrade 'BBB'; -- Rating Watch Place on Negative.
NOTE: The noted ratings were initiated by Fitch as a service to users of Fitch ratings. The ratings are based primarily on public information.