(AMC) and downgraded Atlantic Mutual Insurance Company's surplus note rating to 'B+' from 'BB-'. In addition, all ratings have been removed from Rating Watch Negative. A complete list of companies and ratings appears below. The Rating Outlook is Negative.
Fitch placed the ratings on Rating Watch Negative following AMC's December 2003 announcement that it was selling the renewal rights to its commercial business to OneBeacon Insurance Company (OneBeacon). The ratings were placed on Rating Watch due to Fitch's concern about AMC's ability to achieve expense reductions commensurate with the premium reduction that would result from the sale. AMC completed the sale on March 31, 2004. Combined with a previous sale of its marine business, AMC has now disposed of 65% to 75% of its 2002 premium base. AMC is now a regional personal lines insurer focused on serving the affluent market.
The affirmation of the IFS ratings reflects the significant, timely and appropriate action taken by AMC to reduce its expense base commensurate with the anticipated reduction in written premium. AMC reduced its workforce by approximately 23% in February 2004 and transferred another 28% to OneBeacon upon the close of the commercial lines sale. AMC has planned additional workforce reductions as residual commercial and marine reserves run off. AMC is also in the process of reducing its real estate commitments by selling, subletting or canceling leases on unneeded properties.
To date, AMC's personal lines premium levels have held up well. While new personal insurance submissions have declined somewhat, some decline was anticipated and renewals have remained good.
In assigning the Negative Rating Outlook, Fitch believes that AMC still faces significant execution risk as it must retain its personal lines premium base while continuing to reduce its workforce and real estate expenses. Fitch expects a moderate amount of restructuring costs for personnel and real estate in 2004, while 2005 is likely to be the first year that is not significantly affected by unusual items.
In addition to the commercial lines sale, AMC also strengthened reserves, including asbestos and environmental (A&E) reserves, considerably in 2003, which resulted in a statutory net loss of $136 million. Fitch's prior analysis had indicated the need for a significant reserve change and that need has already been reflected in Fitch's previous rating actions. While the reserve action resulted in a significant net loss for the year, and a commensurate reduction in surplus, it greatly improved the adequacy of AMC's reserves.
The downgrade of the surplus notes reflects AMC's negative interest coverage in 2003 and expectations of modest coverage for 2004 and 2005. The downgrade also considers AMC's high, and increasing, financial leverage as surplus notes now represent approximately 36% of AMC's surplus at year-end 2003.
Additionally, AMC continues to unwind various finite risk reinsurance policies upon which it had previously relied to support earnings and surplus. Although unwinding these contracts will cause AMC to recognize some current period accounting losses, AMC's economic profits will be better without them in the long run and the quality of its reported earnings will be much better.
The changes to AMC's ratings are listed below:
Entity/Issue/Type Action Rating/Outlook
Atlantic Mutual Insurance Company
--Insurer financial strength Affirm 'BBB-';
--Rating Watch Remove from 'Negative';
--Rating Outlook 'Negative'.
Centennial Insurance Company
Atlantic Lloyd's Insurance Company of Texas
--Insurer financial strength Affirm 'BBB-';
--Rating Watch Remove from 'Negative';
--Rating Outlook