Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on Bermuda-based Attorneys’ Liability Assurance Society Ltd. (ALAS) and Attorneys’ Liability Assurance Society Inc. Risk Retention Group to ‘AA-‘ from ‘AA.’
S&P said the action reflected “a re-evaluation of U.S. professional liability insurance risk trends and ALAS’s business position as a monoline writer in that industry sector.” It said the ratings outlook was “stable.”
“The rating considers a very strong, specialized, and solidly performing niche business,” said S&P, “supported by extremely strong capital adequacy, conservative underwriting, and unparalleled client focus. Offsetting these positives are high reinsurance reliance, a narrow business position, and increasing claims trends.” It noted, however that “although ALAS continues to improve its operating performance, it remains a narrowly focused franchise with heavy reinsurance reliance and high levels of recoverables.” The company’s management has shown the “ability to navigate difficult market conditions,” which S&P feels offsets some of the difficulties ALAS faces.
The bulletin cited the following as “Major Rating Factors:
— Strong management team. ALAS’ management team is heavily staffed by experienced attorneys who joined ALAS following long and successful careers in the partnership ranks of law firms. Management’s focus on its niche business and unique training and skills are a competitive advantage for ALAS.
— Extremely strong capital adequacy. ALAS’ capital adequacy as of May 31, 2003, remains at the ‘AAA’ level at 229 percent, consistent with past levels and up from 181 percent as of Nov. 30, 2002, through the growth in capital from unrealized investment appreciation and earnings year-to-date.
— Conservative underwriting. ALAS has held prudent levels of retained risk, and underwrites its members before admissions based on a minimum ten-year loss history.
— Strong business franchise. ALAS has a strong business franchise with a high and growing market share and strong loyalty from its client base. Its competitive strength in client service, its loss prevention expertise, and its uniquely qualified management team have contributed to a sustainable competitive advantage.
— Consistent profitability. Although claims severity is trending negatively, earnings have been consistently positive. Management has also implemented rate increases that are expected to result in a level of profitability appropriate for its mutual structure.
— Narrowly focused business position. ALAS does very well in its established niche and has some room to grow within the attorneys’ liability market, but it is a narrow and mature business profile in a single industry. Although management considers this narrow focus strength, it remains one of the greatest risks to the rating.
— High reinsurance reliance. ALAS depends heavily on reinsurance for the upper layers of its capacity and for the ancillary covers that it extends to policyholders. In fiscal 2002, reinsurance reliance was 56% and remained very high at 58% for the first half of 2003. ALAS continues to experience very strong support from reinsurers; however, a reduction in the capacity available to it might adversely affect the core coverage it offers to policyholders. Increases in reinsurance costs predate coverage renewals and are incorporated into ALAS renewal rates as necessary.
— Negative claims trends. As with many other professional liability writers, ALAS is experiencing negative trends in severity though claims frequency seems to be stable. Standard & Poor’s expects ALAS to adjust its pricing sufficiently to ensure financial strength is not adversely affected by the changes emerging so far.
— Increasing reinsurance recoverables. Reinsurance recoverables are significant for ALAS aggregating $866 million or 3.3x net worth at year-end 2002. Of amounts due, $523 million are collateralized, leaving $343 million due on an unsecured basis or 1.3x net worth at fiscal year-end 2002.
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