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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 IFS rating. While net leverage deteriorated to approximately 1.8x at May 31, 2012 from 1.6x at Nov. 30, 2011, it remained below the average of 2.20x from 2001-2010 and well below highs of almost 4.0x in the late-1990s.

Members' net worth was $707 million at May 31, 2012, a decline of 4.3%, or $31.5 million for the first six months of 2012. The decline was due to a comprehensive loss of $16.6 million, changes in amounts due to former member firms of $11.6 million, and distributions to member firms of $3.3 million.

ALAS reported an underwriting loss for the first six months of 2012 of $75 million. Higher net claim expenses were primarily the result of adverse development of prior period reserves, which totaled $53 million, primarily on two underwriting years.

Fitch believes that ALAS' reserves are within the range of adequacy. ALAS' process for estimating reserves has been consistent over the last several decades. Thus Fitch believes the adverse development reflects the unique challenges inherent in the long-tail nature of ALAS' business and the uncertainty often surrounding the legal issues associated with lawyers' professional liability (LPL) claims.

ALAS' prior year reserve development has fluctuated over time but was consistently favorable for 10 years. The company had not reported adverse development since 2001, when it had an impact on the combined ratio of 7.8 points. Favorable development for 2007-2010 averaged $79 million annually, or 32.1 points. For the 18 months ending May 31, 2012, however, ALAS reported adverse development of prior years' reserves of $141 million, affecting the combined ratio by 42.9 points.

Additional rating strengths 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 insurer, ALAS is reliant on a single market characterized by low-frequency/high-severity claims and higher-than-average earnings and capital volatility. An above-average exposure to equity and alternative investments at 56% 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 and to exercise its ability to make retrospective premium calls if needed.

Key rating triggers that could lead to a downgrade include continued adverse reserve development or other declines in members' net worth that result in a deterioration of net leverage to greater than 2.25x and/or a material and sustained reduction in membership base.

Fitch considers a rating upgrade to be unlikely in the near term due to ALAS' product concentration. Key rating triggers that could lead to an upgrade over the long term include a return to strong underwriting performance and an asset allocation with lower exposure to equity and alternative investments.

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

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