The ratings have been affirmed because performance has been in line with expectations and no upgrade or downgrade triggers were activated.
KEY RATING DRIVERS
The ratings reflect 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,
Loss reserve experience returned to favorable during the first six months of 2016, but the ratings reflect unfavorable experience over the last several years. Favorable reserve development was 0.7% percent of prior year-end reserves for first-half 2016 (1H16). Adverse fiscal-year reserve development was 1.2% of prior year-end reserves in 2015, 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
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 are more readily apparent relative to more diversified insurers.
ALAS' accident year combined ratios (AY-CR) were 118.4% for 6M16, compared to 122.5% for the prior period in 2015. The results improved in part due to changes in reinsurance structure, including the purchase of more reinsurance in the first
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.
Key rating triggers that could lead to a future downgrade include deterioration in statutory net leverage at
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.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
--IFS at 'A'.
Additional information is available at 'www.fitchratings.com'.
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