March 29, 2017 / 4:00 PM / 10 months ago

Fitch Affirms Attorneys' Liability Assurance Society's IFS at 'A'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, March 29 (Fitch) Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings for Attorneys' Liability Assurance Society, Inc., A Risk Retention Group (ALAS) and Attorneys' Liability Assurance Society Ltd. (ALAS Ltd.). The Rating Outlook is Stable. Subsequently Fitch withdrew the rating of ALAS Ltd. as it is not considered by Fitch to be relevant to the agency's coverage because ALAS Ltd. no longer serves as a risk-bearing entity. All insurance risk is contained solely within ALAS. The ratings have been affirmed because performance has been in line with expectations and no upgrade or downgrade triggers were activated. KEY RATING DRIVERS The ratings reflect ALAS's strong capitalization which Fitch believes provides sufficient cushion against high-severity, low-frequency losses and the potential for adverse reserve development, and is a key factor supporting the rating level. The ratings also reflect ALAS's above-average exposure to equity and alternative investments, and resulting risky-asset ratio of 84% of policyholders' surplus at year-end 2016. This adds a potential source of capital volatility over the short term but supports growth in members' net worth over the long term. ALAS' statutory combined ratio improved to 97% in 2016 from 126% a year earlier. Statutory net income improved by 84% in 2016 to $37.7 million. Earnings improvement plus positive unrealized investment gains led to an 8.5% increase in ALAS's policyholders' surplus to $605 million at Dec. 31, 2016. Traditional metrics, including operating leverage of 0.3x and net leverage of 2.4x (net leverage would be 2.5x if securities lending liabilities are included), were more conservative than statutory U.S. non-life sector credit factor (SCF) medians for the current rating. However, statutory RBC ratios are below peer norms and rating guidelines. ALAS's score on Fitch's Prism capital model was 'Strong' at year-end 2015. Loss reserve development returned to favorable levels in 2016, but the ratings reflect unfavorable experience over the last several years. Favorable reserve development was 4.1% of prior year-end reserves for 2016. This followed waning adverse development in 2011-2015 that averaged 6%. The unfavorable development in 2011-2015 was principally tied to loss emergence from a handful of major cases. Average claims severity was relatively steady ranging from $3.1 million to $3.9 million per claim for 2003-2016. ALAS's exposure to reserve risk is high due to the low-frequency/high-severity nature of lawyers' professional liability (LPL) claims. Fitch believes that ALAS's reserve development trends do not reflect a fundamental or systemic change and recognizes this risk has been consistently managed. Other LPL providers have experienced similar results. However, as a monoline LPL insurer, ALAS's higher than average reserve risk and capital volatility are more readily apparent relative to more diversified insurers. ALAS's accident year combined ratios (AY-CR) were 116.6% for 2016, compared to 119.1% for 2015. The results improved in part due to changes in reinsurance structure, including the purchase of more reinsurance in the first $20 million of LPL. Fitch examines ALAS's underwriting performance over a relatively long time due to the inherent low-frequency/high-severity nature of the LPL line. While varying from year to year, ALAS's AY-CRs, including member premium credits, have been very consistent over long periods, averaging 118%, 116% and 120%, respectively, over the five-year, 10-year and 20-year periods ending 2016. Rating strengths also include ALAS's sustainable competitive positioning with superior business retention derived through its service orientation to member law firms in loss prevention and claims management. A high-quality, fixed-income portfolio provides sufficient liquidity to meet policyholder obligations. RATING SENSITIVITIES Key rating triggers that could lead to a downgrade include an increase in statutory net leverage to greater than 3.0x, the failure to maintain a Prism score within the 'Strong' category, and a sustained deterioration in the membership base. Fitch expects reserve volatility in the future, but adverse fiscal-year reserve development greater than 8% of prior year-end reserves could also lead to a downgrade. Key rating triggers that could lead to an upgrade going forward include a Prism score maintained in the 'very strong' category, continued growth in the membership base that demonstrates the value of ALAS's underwriting franchise, and a sustained shift in reserve experience towards consistent favorable reserve development. FULL LIST OF RATING ACTIONS Fitch has affirmed the following rating with a Stable Outlook: Attorneys' Liability Assurance Society, Inc., A Risk Retention Group --IFS at 'A'. Fitch has affirmed and withdrawn the following rating with a Stable Outlook: Attorneys' Liability Assurance Society Ltd. --IFS at 'A'. Contact: Primary Analyst Martha M. Butler, CFA Senior Director Fitch Ratings, Inc. +1-312-368-3191 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Brian C. Schneider, CPA, CPCU Senior Director +1-312-606-2321 Committee Chairperson Donald F. 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