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Fitch Affirms Attorneys' Liability Assurance Society's IFS at 'A+'; Outlook Revised to Negative.

CHICAGO -- Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Attorneys' Liability Assurance Society (Bermuda) Ltd. and Attorneys' Liability Assurance Society, Inc., A Risk Retention Group (referred to collectively as ALAS). The Rating Outlook is revised to Negative from Stable.

KEY RATING DRIVERS

ALAS' strong capital is an essential factor supporting Fitch's affirmation of the IFS rating. Members' net worth was $690 million at fiscal year ended Nov. 30, 2012, a decline of $48 million or 6.6% from Nov. 30, 2011. While still conservative, net leverage deteriorated to 1.92x at year-end 2012, from 1.60x at year-end Nov. 30, 2011. ALAS' score on Fitch's Prism economic capital model was 'strong' at year-end 2012. Fitch expects ALAS to continue to protect and manage its capital position by addressing pricing considerations and loss experience.

The revision in Rating Outlook to Negative is driven by large underwriting losses in each of the last two years, primarily due to adverse development of prior-period reserves on two policy years. Adverse development of prior period reserves totaled $87 million in 2011 and $109 million in 2012.

ALAS' accident year combined ratios (AY-CR), including member premium credits, have been very consistent over long periods, averaging 114%, 114.2% and 113.9% over the five-year, 10-year and 20-year time periods ending 2012.

Fitch believes that ALAS' reserves are within the range of adequacy and the company's process for estimating reserves has been consistent over several decades. However, adverse development in the past two years highlights the unique challenges inherent in the long-tail nature of ALAS' business and the uncertainty often surrounding the legal issues associated with lawyers' professional liability (LPL) claims.

Recent results do not appear to reflect a fundamental or systematic change and other LPL providers have experienced similar results. ALAS' results in 2011 and 2012 are largely the product of a handful of major cases, largely from higher claims severity in two policy years, 2008 and 2009. Claim frequency per 1,000 attorneys at 8.5 for 2012 compares to higher than 9 throughout the 1990s and higher than 10 in some years.

Additional rating strengths include ALAS' well-established, successful operations in the LPL market and a high-quality, fixed-income portfolio that provides sufficient liquidity to meet policyholder obligations. ALAS enjoys sustainable competitive advantages in loss prevention, claims management, and business retention derived from its relationship with member-attorneys and its service orientation.

Ratings concerns are focused on business concentration risks. As a monoline insurer, ALAS is reliant on a single market characterized by low-frequency/high-severity claims and higher-than-average earnings and capital volatility. An above-average exposure to equity and alternative investments at 58% of members' net worth is an additional source of capital volatility.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade are continued adverse reserve development similar in level to the last two years, a deterioration of net leverage to greater than 2.25x, and a material and sustained deterioration in the Prism score and/or membership base.

Key rating triggers that could lead to a return to a Stable Rating Outlook are strong evidence that adverse reserve development experience is subsiding and that recent rate increases are promoting improved accident year results.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
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Publication:Business Wire
Geographic Code:1U3IL
Date:Mar 1, 2013
Words:783
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