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

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the 'A+' Insurer Financial Strength (IFS) ratings of Attorneys' Liability Assurance Society (Bermuda) Ltd. and Attorneys' Liability Assurance Society, Inc., A Risk Retention Group (referred to collectively as ALAS). The Rating Outlook is Stable.

ALAS' strong capital position is an essential factor supporting its strong IFS rating. ALAS' members' net worth declined 9.1% to $764 million at Aug. 31, 2011, from Nov. 30, 2010, the latest fiscal year-end. The decrease in members' net worth of $76.2 million for the nine months ended Aug. 31, 2011, was due to distributions to member firms of $34.6 million, changes in amounts due to member firms of $15.9 million and a year-to-date comprehensive loss of $25.7 million from a net underwriting loss partially offset by a positive total investment return.

For the nine months year-to-date, ALAS reported an underwriting loss of $96 million. Higher net claims expenses in 2011 were primarily the result of adverse development of prior period reserves, which totaled $75 million compared with net reserve redundancies of $78 million for the same period in 2010. Fitch estimates that net leverage deteriorated to 1.5 times (x) from 1.35x at year-end 2010.

Fitch believes that ALAS' loss reserves are within the range of adequacy and that the company's reserving philosophy and process are conservative and well-managed. Fitch notes that estimating ultimate loss and loss adjustment expense reserves accurately presents unique challenges, given the long-tail nature of ALAS' business and the uncertainty often surrounding the legal issues associated with lawyers' professional liability (LPL) claims.

Fitch observes that ALAS has not reported fiscal year adverse development of prior years' reserves since 2001, when it impacted the combined ratio by 7.8%. Over the last five years favorable development has benefited the combined ratio by an average of 28.4 points.

Rating strengths also include ALAS' well-established, successful operations in the LPL market, and a high-quality, fixed-income portfolio that provides sufficient liquidity to meet policyholder obligations. ALAS enjoys sustainable competitive advantages in loss prevention, claims management, and business retention derived from its relationship with member-owners and its service orientation.

Ratings concerns are focused on concentration risks. As a monoline LPL insurer, ALAS is reliant on a single market characterized by low-frequency/high-severity claims and higher-than-average earnings and capital volatility. The company's above-average exposure to equity and alternative investments, at 53% of members' net worth, is an additional source of capital volatility.

Fitch expects ALAS to continue to protect and manage its capital position by addressing pricing considerations and loss experience through premium credits and to exercise its ability to make retrospective premium calls if needed.

Key rating triggers that could lead to a downgrade over the long term include continued adverse reserve development or other declines in members' net worth that results in a deterioration of net leverage to greater than 2.25x and/or a material and sustained deterioration in franchise, such as lawyer census, or in underwriting, such as a systemic increase in severity.

Fitch considers a rating upgrade to be unlikely in the near term due to ALAS' product concentration in lawyers' professional liability insurance. Key rating triggers that could lead to an upgrade over the long term include continued strong underwriting performance, and an asset allocation with lower exposure to equity and alternative investments, that cause Fitch to view ALAS as comparable from a ratings perspective with higher rated companies with more product diversification.

Founded in 1979, ALAS insures over 58,500 lawyers in 233 law firms in 48 states and the District of Columbia. About 6% of lawyers practice outside of the U.S.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.