Fitch Affirms Attorneys' Liability Assurance Society's IFS at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A' Insurer Financial Strength (IFS) ratings for 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.

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, Attorneys' Liability Assurance Society Inc., A Risk Retention Group (ALAS Inc.) totaled $557 million at Dec. 31, 2015 a decline of 6% or $37 million from the prior year. The decline was primarily due to unrealized losses on equities and alternative investments that exceeded 2015 statutory net income of $20 million.

Traditional capital adequacy metrics, including operating leverage of 0.4x and net leverage of 2.6x, were more conservative than statutory sector credit factors (SCF) medians for the current rating. However, statutory risk based capital (RBC) ratios are below peer norms and rating guidelines. ALAS' score on Fitch's Prism capital model was 'strong' at year-end 2014. ALAS' 2015 Prism score will be generated shortly. The score could decline based on the change in surplus for 2015. Maintaining a Prism score consistently below 'Strong' could lead to a negative rating action.

The ratings also reflect unfavorable loss reserve experience over the last several years. Adverse fiscal-year reserve development improved as a percent of prior year-end reserves, to 1.2% in 2015, compared with 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 is more readily apparent relative to more diversified insurers.

ALAS' accident year combined ratios (AY-CR) were 119.1% for 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%, 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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000972

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000972

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
Fitch Ratings, Inc.
+1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU
Senior Director
+1-312-606-2321
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
Fitch Ratings, Inc.
+1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Brian C. Schneider, CPA, CPCU
Senior Director
+1-312-606-2321
or
Committee Chairperson
Donald F. Thorpe, CPA, CFA
Senior Director
+1-312-606-2353
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com