Ratings Roundup: Attorneys’ Liability, AMI
Standard & Poor’s Ratings Services has revised its outlook on Bermuda-based Attorneys’ Liability Assurance Society (Bermuda) Ltd. and its Vermont-based operating unit, Attorneys’ Liability Assurance Society Inc. RRG (collectively referred to as ALAS), to negative from stable, and has affirmed its ‘A+’ counterparty credit and financial strength ratings on both companies. “The revised outlook reflects our view that ALAS’s near-term earnings profile has deteriorated significantly because of the adverse reserve development it reported in the first quarter of 2011,” explained credit analyst Siddhartha Ghosh. “In addition, we believe ALAS could bolster its reserves again over the next 12 months.” ALAS has reported an underwriting loss for the first quarter of 2011, with a GAAP combined ratio of 136.4 percent, up sharply from 89.2 percent (excluding premium credit expenses) for the same period in 2010.” S&P pointed out that “ALAS’s monoline business profile in the volatile professional lawyers liability business has the embedded risk of high-severity claims, which could lead to material adverse reserve developments and lower earnings. In addition, the company continues to maintain an aggressive investment strategy, with a high concentration in equities and alternative investments, which over time also adds to the volatility in earnings and capital. S&P said its affirmation of the ratings is “based on ALAS’s strong competitive position in a niche insurance market, where the company has a long-standing leadership for many years. The company’s loyal owners/insureds (a renewal retention rate of 99 percent as of year-end 2010) as well as its strong loss prevention through its disciplined underwriting and claims management expertise have enhanced its competitive position. Also supporting the ratings are the company’s strong and experienced management team, strong underwriting expertise that has contributed to the company’s historically strong profitability, and strong capital adequacy.” The rating agency explained that the “negative outlook reflects ALAS’s deteriorated earnings profile and our increased uncertainty about potential adverse reserve developments over the next 12 months. The company has reported $17 million of net adverse reserve development through its fiscal quarter ended Feb. 28, 2011, which was primarily related to its business underwritten in recent years. At the same time, we also believe that ALAS’s competitive position will remain strong in the foreseeable future. In addition, we believe the company’s effective risk controls, loss prevention, and strong claims-management practices should help ALAS remain profitable, though not as profitable as it had been historically. We expect that ALAS’s consolidated capital adequacy–as determined by our capital model–will remain strong and supportive of the current ratings, though it could remain volatile because of potential adverse reserve development or investment-related losses.” In addition S&P indicated that if, in the next 12 months, “ALAS’s operating earnings deteriorate significantly from repeated reserve developments, its capital adequacy deteriorates, or its membership base decreases significantly, we could lower the ratings, though probably by no more than one notch. Conversely, if the company’s earnings profile does improve and gradually returns to its historical levels while maintaining strong capital adequacy and stable clientele, we could affirm the ratings.”
A.M. Best Co. has removed from under review with negative implications and affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of New Zealand’s AMI Insurance Limited, and has assigned both ratings a stable outlook. The rating actions “reflect AMI’s adequate risk-adjusted capital position, with a back-up capital support facility from the New Zealand Government for the company after its financial position has been significantly affected by the two Canterbury earthquakes,” Best explained. The ratings also “recognize the company’s strengthened reinsurance protection. Offsetting factors are the potential unfavorable impact on the business profile and weaker anticipated operating profitability over the near future. AMI has issued NZD 500 million [US$412.6 million] of called but unpaid convertible preference shares to the Crown. With an upfront establishment fee of NZD 15 million [US$12.377 million] paid by AMI to the Crown, the company could call on the arrangement when its own resources are drained. This potential NZD 500 million injection creates the opportunity for AMI to continue operating and seek alternative sources of capital over the coming years.” Best added that “following the earthquake in February 2011, AMI has arranged reinsurance cover of NZD 1 billion [US$825 million] (from the upper limit of NZD 600 million [US$495 million]) to meet a third event and extra cover to meet a fourth event if they occur before fiscal year ending June 30, 2011. The company considers extending the upper limit of the catastrophe cover from existing back-up cover of NZD 1 billion for the next fiscal year, which could alleviate unexpected claims resulting from catastrophe events going forward.” In addition Best noted that the Government’s financial support for AMI “ensures that the company is able to meet all of its policyholders’ claims and to rebuild Christchurch orderly after the two earthquakes.” Best said it “views this capital support favorably and recognizes AMI’s unique and significant presence in the local insurance market.” However, Best indicated that it is “concerned about the company’s business profile, which could be negatively affected following significant losses resulting from the earthquakes and the challenges posed by the local market conditions going forward.”