Fitch Downgrades Attorneys' Liability Assurance Society's IFS to 'A'; Outlook Stable

Fitch Ratings has downgraded to 'A' from 'A+' the 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 rating downgrade reflects unfavorable loss reserve experience over the last several years that continued through the first nine months of 2014. Adverse calendar year reserve development deteriorated to 5.5% of prior year-end reserves. This compared with 0.6% of prior year-end reserves for the full year 2013, 12.7% for 2012 and 11.7% for 2011. For 2010 and 2009 reserves developed favorably as a percent 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's reserve development trends do not reflect a fundamental or systemic change and recognizes that 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.

Fitch believes ALAS's capitalization provides sufficient cushion against high-severity, low-frequency losses and the potential for adverse reserve development, and is a key factor supporting the current rating level. Traditional capital metrics for ALAS Inc., including operating leverage of 0.4x and net leverage of 2.5x at June 30, 2014, are more conservative than statutory sector credit factors (SCF) medians for 'AA' IFS ratings of 1.1x and 3.5x, respectively. Policyholders' surplus totaled $600 million at June 30, 2014.

ALAS's score on Fitch's Prism capital model was 'strong' at year-end 2013, the same result as 2012. Prism available capital (AC) is an accounting figure representing cash equivalent funds that are readily available under stressful conditions. Fitch expects ALAS to continue to protect and manage its capital position by addressing pricing considerations and loss experience.

ALAS's accident-year combined ratios (AY-CR) improved to 111.7% for the first nine months of 2014, from 113.7% in 2013 and 126.2% in 2012. While varying from year to year, ALAS's AY-CRs, including member premium credits, have been very consistent over long periods, averaging 117.8%, 113.1%, and 117.0% over the five-year, 10-year, and 20-year time periods ending 2013. ALAS has not paid premium credits to its members since 2010 based in part on this underwriting performance.

Rating strengths also include ALAS's 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 60% 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 3x, 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 a pattern of adverse volatility worse than that observed over the last 20 years could also lead to a future downgrade.

Key rating triggers that could lead to an upgrade going forward include changes in reserving practices that promote longer-term stability in reserve experience, a Prism score maintained in the 'very strong' category, and continued growth in the membership base that demonstrates the value of ALAS's underwriting franchise.

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

Applicable Criteria and Related Research:

-- 'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913635

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