Ratings Affirmed For Bermuda’s ALAS
Fitch Ratings this week [Feb.28] affirmed the “A+” Insurer Financial Strength [IFS] ratings of Bermuda’s Attorneys’ Liability Assurance Society Ltd. and Attorneys’ Liability Assurance Society, Inc., a risk retention group referred to collectively as ALAS.
The rating outlook is stable. ALAS’ strong capital position is an essential factor supporting its Insurer Financial Strength [IFS] rating. While members’ net worth declined 12.1% in 2011, it was 1.9% higher than year-end 2009 with a decline in business volume over the two-year period. Net leverage deteriorated modestly to 1.6 times at November30, 2011 from 1.35x at year-end 2010 but remained well below highs of almost 4.0x in the late-1990s.
The decrease in members’ net worth of $102 million for 2011 was primarily due to a decrease in unrealized investment gains of $38 million, distributions to member firms of $35 million, and a net loss of $13 million.
ALAS reported an underwriting loss for 2011 of $114 million. Higher net claim expenses were primarily the result of adverse development of prior period reserves, which totaled $87 million, compared with net reserve redundancies of $74 million reported in 2010.
Fitch analysts believe that ALAS’ reserves are within the range of adequacy and that the company could experience some continued adverse reserve development over the short term without endangering its current ratings.
ALAS’ prior year reserve development has fluctuated over time but was consistently favorable for 10 years. The company has not reported adverse development since 2001, when it impacted the combined ratio by 7.8 points. Favorable development for 2007-2010 averaged $79 million annually, or 32.1 points.
In 2011, ALAS’ reported adverse development of prior years’ reserves was $87 million, impacting the combined ratio by 39.3 points. ALAS’ process for estimating reserves has been consistent over the last several decades.
The ratings agency said it believes the adverse development “reflects the unique challenges, given the long-tail nature of the company’s business and the uncertainty often surrounding legal issues associated with lawyers’ professional liability (LPL) claims.”
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-owners and its service orientation.
Ratings concerns are focused on 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 53% of members’ net worth is an additional source of capital volatility. Fitch expects ALAS to continue to protect and manage its capital position by addressing pricing considerations and loss experience through premium credits and to exercise its ability to make retrospective premium calls if needed.
Fitch said key rating triggers that could lead to a downgrade include continued adverse reserve development or other declines in members’ net worth that result in a deterioration of net leverage to greater than 2.25x and/or a material and sustained deterioration in membership base.
Fitch considers a rating upgrade to be unlikely in the near term due to ALAS’ product concentration. But key rating triggers that could lead to an upgrade over the long term include continued strong underwriting performance and an asset allocation with lower exposure to equity and alternative investments that causes Fitch to view ALAS as comparable from a ratings perspective with higher rated companies with more product diversification.
