A.M. Best Downgrades Ratings of Atlantic Mutual Companies

A.M. Best Co. has downgraded the financial strength rating of The Atlantic Mutual Companies (The Atlantic) (New York) to B++ (Very Good) from A- (Excellent).

Concurrently, A.M. Best has downgraded the debt rating of Atlantic Mutual Insurance Company’s existing $100 million 8.15 percent surplus notes, due February 2028, to “bb+” from “bbb”. The ratings have been removed from Under Review and the ratings have been assigned a Negative outlook.

This action follows A.M. Best’s review of The Atlantic’s capital enhancement initiatives during the past several months, as to the benefits they afford and their future impact on the sustainability of earnings, capital accumulation and the quality of surplus.

Since early June, management has been pursuing various capital raising alternatives designed to replace soft capital with permanent funds and enhance the quality of surplus and earnings. Included among these capital raising initiatives was the sale of select marine business renewal rights and capital gains generated from the sale of common equities and fixed income securities. Integral to the group’s plan to improve capitalization and the quality of earnings was the replacement of soft capital (via reinsurance commutations) with hard capital, the sale of common equities and expense reductions.

While A.M. Best acknowledges management’s efforts and achievements thus far, the rating downgrades reflect the variance between the expected and actual levels of new capital raised by The Atlantic, the resulting level of capitalization relative to the ratings and the company’s limited financial flexibility.

The rating actions also consider The Atlantic’s ability to generate future earnings and accumulate capital, while taking into account its historically weak underwriting and operating performance, continued interest expense associated with funds-held reinsurance and potential for continued adverse prior year loss reserve development. Additionally, A.M. Best believes The Atlantic’s asbestos and environmental (A&E) reserves are not fully funded, and this potential A&E reserve shortfall is considered in the evaluation of capitalization. This evaluation of capitalization also recognizes a completed ground-up asbestos study, which indicated The Atlantic’s ultimate asbestos liability to be lower than A.M. Best had originally contemplated.

While several of The Atlantic’s reinsurance treaties are planned to be commuted over the near term, several aggregate stop loss agreements and a sizable adverse development cover were left in place due to economic reasons. Albeit lower, interest expenses on The Atlantic’s remaining funds-held reinsurance agreements will continue to temper net investment income and lower earnings.

In addition, interest expenses on outstanding surplus notes and lower reinvestment yields should continue to adversely impact net investment income. This is partially offset by the group’s sale of common equities and the re-investment of proceeds into fixed income securities, which should provide a larger base with which to generate additional net investment income.

Despite the rating downgrades, the group’s capitalization remains secure and underwriting results on more recent accident years appear to be improving. Management attributes much of this reported improvement to aggressive pricing and re-underwriting initiatives taken since late 1999. The hardening of the property and casualty markets over this period has also been highly beneficial in this regard.

The financial strength ratings have been downgraded to B++ (Very Good) from A- (Excellent) for The Atlantic Mutual Companies and the following members:

· Atlantic Lloyd’s Insurance Company of Texas
· Atlantic Mutual Insurance Company
· Atlantic Specialty Insurance Company
· Centennial Insurance Company