OREANDA-NEWS. Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings of Attorneys' Liability Assurance Society Ltd. (ALAS Ltd.) and Attorneys' Liability Assurance Society, Inc., A Risk Retention Group (ALAS Inc.). The Rating Outlook is Stable.

KEY RATING DRIVERS

The affirmation reflects 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.

Policyholders' surplus for ALAS Inc. totaled \$594 million at Dec. 31, 2014 and traditional metrics, 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' IFS ratings of 1.1x and 3.5x, respectively. ALAS' score on Fitch's Prism capital model was 'strong' at year-end 2013, and Fitch expects the 2014 score to remain 'strong'.

The ratings also reflect unfavorable loss reserve experience over the last several years that continued in 2014 and drove the ratings downgrade on Oct. 31, 2014. Adverse calendar-year reserve development deteriorated to 3.5% of prior year-end reserves in 2014 compared with 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' 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 is more readily apparent relative to more diversified insurers.

ALAS' accident year combined ratios (AY-CR) improved to 112.2% for 2014, from 113.7% in 2013 and 126.2% in 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' sustainable competitive positioning with superior business retention that is 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 that adds a potential source of capital volatility.

RATING SENSITIVITIES

Key rating triggers that could lead to a future downgrade include a 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 reserves 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.