Atlantic Mutual Under Review

A.M. Best Co. placed the financial strength rating of “A-“(Excellent) of the Atlantic Mutual Cos. under review with negative implications. Concurrently, the “bbb” debt rating of Atlantic Mutual Insurance Co.’s existing $100 million 8.15 percent surplus notes, due February 2028 were placed under review with negative implications.

This action reflects A.M. Best’s heightened concerns regarding The Atlantic’s capitalization and the quality of earnings and surplus, in view of its weak underwriting and operating performance and its use of reinsurance transactions to bolster surplus. Furthermore, the group has somewhat limited financial flexibility and the potential for continued adverse prior year loss reserve development. Management is pursuing various capital-raising alternatives designed to replace soft capital with permanent funds and enhance the quality of surplus and earnings.

In 2002, The Atlantic purchased an adverse development cover, which allowed the group to increase prior year loss reserves by $86 million and take the benefit of $68.5 million in discounted workers’ compensation and general liability reserves. The Atlantic utilizes quota share and aggregate stop loss reinsurance, which has enabled it to effectively reduce net premium in 2002 and enhance net underwriting results in 1999 and 2000. However, all of these reinsurance agreements included funds held interest expenses and aggregate liability limits. A.M. Best believes these reinsurance covers provide temporary surplus relief and will ultimately lessen future earnings.

The financial strength rating of “A-“(Excellent) has been placed under review with negative implications for the Atlantic Mutual Cos. and the following members: Atlantic Lloyd’s Insurance Company of Texas, Atlantic Mutual Insurance Co., Atlantic Specialty Insurance Co., and Centennial Insurance Co.