Ratings Recap: Hatherley, Attorneys Liability

A.M. Best Co. has upgraded the financial strength rating to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating to “a” from “a-” of Bermuda-based Hatherley Insurance Ltd., both with stable outlooks. The ratings reflect Hatherley’s “strong risk-adjusted capitalization, excellent liquidity and conservative operating strategy,” said Best. The ratings also consider the company’s important role within JPMorgan Chase & Co., a leading global financial services group, as a single parent captive for the group’s casualty insurance programs. Best noted that as part of JPMorgan Chase, “Hatherley also benefits from the group’s extensive risk management and business continuity programs, as well as its substantial financial flexibility. Partially offsetting these positive rating factors are Hatherley’s variable operating results in recent years. Hatherley is well capitalized as reflected in its moderate underwriting leverage and excellent risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR). Hatherley’s exposure to large losses is manageable as its highest loss per occurrence is capped.” Best also indicated that the company also has “excellent liquidity, with a large cash position and assets mostly invested in short-term fixed deposits. Hatherley’s surplus was boosted by exceptional retained earnings in 2006, related in part to a loss portfolio transfer (LPT) following JPMorgan Chase’s merger with the former Bank One. In 2005, Hatherley assumed a portfolio of risks from a former Bank One captive, and the reserves from the LPT have developed favorably since then, allowing Hatherley to benefit from reserve releases. Additionally, effective May 30, 2008, Bear Stearns’ companies were added to Hatherley’s programs.” However, Best also pointed out that Hatherley’s “operating performance has been variable but favorable on a five-year average basis. The company’s losses in 2004 and 2005 were largely attributable to exceptional items. In those years, Hatherley significantly increased its incurred but not reported reserves due to conservatism associated with the Bank One merger and a large LPT. In 2004, the company also recognized a large asset impairment charge from an unquoted investment. Nevertheless, as reserve development has been more favorable than anticipated, Hatherley released some reserves in 2006 and recorded exceptional earnings. JPMorgan Chase has observed a significant improvement in loss patterns since the merger due to the better risk diversification and profile of exposures, as well as improved claims management by JPMorgan Chase and its third-party administrator.” Best said it “expects Hatherley to continue to register strong earnings.”

Standard & Poor’s Ratings Services has lowered its counterparty credit and financial strength ratings on Bermuda-based Attorneys’ Liability Assurance Society (Bermuda) Ltd. and its Vermont-based subsidiary, Attorneys’ Liability Assurance Society Inc. RRG (collectively referred to as ALAS), to ‘A+’ from ‘AA-‘. The outlook on both companies is stable. “The downgrade reflects our view that ALAS’ narrow business model limits the company’s strategic flexibility, which we no longer view as commensurate with the former rating,” explained credit analyst Taoufik Gharib. S&P said that despite its well-established competitive position in the attorneys’ professional liability niche market, “the company is concentrated in one line of business, subjecting it to the vagaries of this market segment. ALAS’ business profile has not deteriorated, but we view its concentrated position as less favorable vis-à-vis more diversified peers’.” Gharib added that the rating action “also reflects our view that ALAS still has an aggressive investment strategy even though it reduced its maximum allowed exposure to equities and alternative investments to 25 percent of total invested assets in 2009 from 38 percent previously.” Amid the current economic conditions, “ALAS faces a potential reduction in the number of insured lawyers because members could reduce headcounts or even close their practices,” S&P continued, “although ALAS had no firm dissolutions in 2009 and has had only one dissolution in the past three years. Conditions have improved somewhat for large firms in 2010 from a year ago, although large law firms are focusing on operating expenses. Inevitably, this may draw attention to lawyers’ professional liability insurance, which is one of the largest costs in a law firm’s budget.” In addition S&P noted that “reinsurance utilization remained high in 2009, at 29 percent, but has declined from 40 percent in 2005 as management has retained more risk on its books, supported by the strength of its members’ net worth. On the positive side, ALAS has a strong competitive position in its legal professional liability niche market, supported by loyal owners/insureds and by its strong loss prevention through its disciplined underwriting and claims management expertise.” S&P said the stable outlook reflects “our view that ALAS’ competitive position will remain strong, supported by the company’s loyal client base. Its superior underwriting, loss prevention and claims-management practices should continue to generate ongoing profitability, which will sustain the strong levels of capital underlying the rating.”