Atlantic Mutual ratings fall as surplus drops $100 million
Ratings analysts who downgraded personal lines insurer Atlantic Mutual earlier this month will be meeting with the company in the coming weeks to review results of the fourth quarter and all of 2005 before deciding what to do next.
“We have the 2005 information now but we haven’t sat down and talked with them. We only talked very quickly,” noted Antony Diodato just days after his firm, A.M. Best, placed the Atlantic Mutual Companies of New York under review with negative implications.
A.M. Best downgraded the debt rating to ccc from b+ of the $100 million 6.05% 30-year surplus notes issued by Atlantic Mutual Insurance Company. It also downgraded the financial strength ratings to B- (Fair) from B+ (Very Good) and the issuer credit ratings to bb- from bbb of the group’s subsidiaries, Atlantic Mutual Insurance Company and Centennial Insurance Company.
Initial reaction
Those changes were the Oldwick, N.J., rating agency’s initial response to the companies’ $100 million drop in surplus at year-end 2005. At year-end 2005, surplus stood at $141 million, compared to $244 million in 2004, according to Joel Silverthorn, A.M. Best senior financial analyst.
Standard & Poor’s Ratings Services took similar action, lowering and placing the insurer’s credit ratings on CreditWatch with negative implications, while expressing concern over the company’s fourth quarter loss and the fact that 80 percent of the companies’ surplus is in surplus notes.
Atlantic Mutual declined to comment.
The larger than expected reduction in surplus is being blamed largely on the group’s discontinued commercial lines business. Atlantic Mutual sold its specialty commercial lines business to One Beacon and its marine accounts to Travelers but adverse development in the commercial business that is in runoff has required more reserving than anticipated, according to Diodato and Silverthorn.
Dropped reinsurance
Diodato noted that the insurer unrolled the reinsurance it used to have on this commercial business during 2004 and 2005. More than 70 percent of its reserving is tied to this exited commercial lines business.
A.M. Best is concerned that even more reserving may be necessary. “The potential for continued adverse prior year development of the group’s loss reserves remains present and fuels the uncertainty regarding its future financial strength, which remains dependent upon Atlantic’s underwriting and operating profitability (having been weak in recent years) and remains an ongoing concern as the group attempts to improve its situation,” A.M. Best said in releasing its downgrades.
Focus on personal lines
Since it exited commercial insurance lines, Atlantic Mutual has been focusing on the upscale personal lines marketplace. Its flagship product is The Atlantic Master Plan, which provides coverage to affluent individuals for homes, automobiles, valuables and watercraft, along with personal liability protection.
While the company faces the potential for continued losses on its legacy commercial lines business, it also now faces challenges in the ratings-sensitive personal homeowners business, where mortgage companies tend to require a B rating, the analysts noted.
A.M. Best analysts said they plan to sit down with executives and learn how the company’s management plans to proceed with its current capitalization. They said an updated analysis is likely within three months.
S&P’s concerns
Atlantic Mutual executives will also be meeting with representatives from Standard & Poor’s Ratings Services. S&P lowered its counterparty credit rating on Atlantic Mutual Insurance Co. to B+ from BB+; lowered its rating on Atlantic Mutual’s surplus notes to CCC from B+; and also placed the ratings on CreditWatch with negative implications.
“Because surplus notes have increased as a proportion of total surplus, the risk of default on the surplus notes has increased and for this reason the notching on the surplus notes was increased,” explained S&P analyst, Jason Jones.
“Reported results and surplus were well below our expectations, resulting in the rating action,” Jones added. “Atlantic Mutual’s capital adequacy was materially weakened by its fourth-quarter loss, and quality of capital weakened because the $115 million of surplus notes now constitute about 80 percent of total surplus.”
The insurer’s state regulator approved an interest payment on the surplus notes in February 2006, according to Jones. The risk-based capital ratio for Atlantic Mutual was about 250 percent at year-end and the RBC of its subsidiary Centennial Insurance Co. was about 500 percent, both of which are more than the company action level.
Jones indicated that among the factors that could affect the rating outcome is the strategic alliance with Countrywide Financial Corp. that Atlantic Mutual penned in July last year to expand the availability of the Atlantic Master Plan insurance product nationwide.
The deal was designed to draw on Countrywide Insurance Group’s A rating and its parent company’s national presence. The deal allowed Atlantic Mutual’s independent agents to leverage the higher rating of the P&C division of Countrywide Insurance Group while giving Countrywide access to a new distribution channel of independent agents.
The two insurers said they planned to extend their partnership to western states and Texas, where Countrywide Insurance Group operates but Atlantic Mutual does not.
Additional questions
In addition to questioning the Countrywide affiliation, S&P said it would look into whether the loss reserve deterioration can be remedied and whether there might be potential benefits from reinsurance.
S&P said it intends to discuss the reasons for the company’s poor results in the fourth quarter of 2005 in the near term and resolve the CreditWatch shortly thereafter. The ratings could be affirmed or they could be lowered further.