Fitch Affirms Attorneys' Liability Assurance Society's IFS at 'A'; Outlook Stable
KEY RATING DRIVERS
The affirmation reflects 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.
Policyholders' surplus for ALAS Inc. totaled $583 million at June 30, 2015. Traditional metrics at year-end 2014, including operating leverage of 0.4x and net leverage of 2.5x, were more conservative than statutory sector credit factors (SCF) medians for the 'AA' Insurer Financial Strength (IFS) ratings of 1.1x and 3.5x, respectively. ALAS's score on Fitch's Prism capital model was 'strong' at year-end 2014.
The ratings also reflect unfavorable loss reserve experience over the last several years that drove the ratings downgrade on Oct. 31, 2014. Adverse calendar-year reserve development improved to 0.8% of prior year-end reserves in the first six months of 2015 compared with 3.5% for 2014, 0.6% for 2013, 12.7% for 2012 and 11.7% for 2011. For 2010 and 2009 reserves developed favorably as a percentage of prior year-end reserves by 10.3% and 10.8%, respectively.
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 is more readily apparent relative to more diversified insurers.
ALAS's accident year combined ratios (AY-CR) were 122.5% for the first six months of 2015, 112.2% for 2014, 113.7% for 2013 and 126.2% for 2012. Fitch examines ALAS' 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' AY CRs, including member premium credits, have been very consistent over long periods, averaging 117%, 114%, and 118% over the five-year, 10-year, and 20-year periods ending 2014, respectively. ALAS has not paid premium credits to its members since 2010 based in part on this underwriting experience.
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.
An additional risk factor considered in the rating is the above-average exposure to equity and alternative investments at 75% of members' net worth at Nov. 30, 2014 that adds a potential source of capital volatility.
Key rating triggers that could lead to a future downgrade include deterioration in statutory net leverage at ALAS Inc. to greater than 3.0x, the failure to maintain a Prism score comfortably within the 'strong' category and a sustained deterioration in the membership base. Fitch expects reserve volatility in the future, but adverse calendar-year reserve development greater than 8% of prior year-end reserves could also lead to a future 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' underwriting franchise, and a shift in reserve experience towards consistent favorable reserve development.