Fitch Affirms Attorneys' Liability Assurance Society's IFS at 'A'; Outlook Stable
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' 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' above-average exposure to equity and alternative investments, and resulting risky-asset ratio of 94% of members' net worth at year-end 2015. This adds a potential source of capital volatility over the short term but supports growth in members' net worth over the long term.
Policyholders' surplus for ALAS' risk-bearing subsidiary, ALAS Inc., totaled $569 million at June 30, 2016, an increase of $12 million from the prior year-end. Traditional capital adequacy metrics, including operating leverage of 0.4x and net leverage of 2.7x, were more conservative than statutory sector credit factors (SCF) medians for the current rating. ALAS' score on Fitch's Prism capital model was 'Strong' at year-end 2015.
Loss reserve experience returned to favorable during the first six months of 2016, but the ratings reflect unfavorable experience over the last several years. Favorable reserve development was 0.7% percent of prior year-end reserves for first-half 2016 (1H16). Adverse fiscal-year reserve development was 1.2% of prior year-end reserves in 2015, 3.5% for 2014, 0.6% for 2013, 12.7% for 2012 and 11.7% for 2011. The unfavorable development in 2011-2015 was principally tied to loss emergence from a handful of major cases. Average claims severity has been relatively steady ranging from $3.2 million to $3.9 million per claim for 2002-2015.
ALAS' exposure to reserve risk is high due to the low-frequency/high-severity nature of lawyers' professional liability (LPL) claims. Fitch believes that ALAS' 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' higher than average reserve risk and capital volatility are more readily apparent relative to more diversified insurers.
ALAS' accident year combined ratios (AY-CR) were 118.4% for 6M16, compared to 122.5% for the prior period in 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' 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%, 115% and 119% over the five-year, 10-year and 20-year periods ending 2015, respectively.
Rating strengths also include ALAS' 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 future downgrade include deterioration in statutory net leverage at ALAS Inc. to greater than 3.0x, the failure to maintain a Prism score in 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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Attorneys' Liability Assurance Society Ltd.
Attorneys' Liability Assurance Society, Inc., A Risk Retention Group
--IFS at 'A'.
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