Moody's said that the commuted reinsurance treaties have been replaced by a more comprehensive reinsurance cover but that the new agreement requires the company to retain an increased level of adverse loss reserve development risk. While the rating agency does not view the commutations as impacting the company's economic capital, the reduction in statutory surplus does create greater regulatory risk by placing the group in a less favorable position with respect to regulatory capital. This risk is especially pronounced with respect to the payment of interest on the group's surplus notes, which require regulatory approval. Nevertheless, while regulatory capital is lower, the group's underwriting and investment risk is also lower.
Further, Moody's notes that while the strategic affiliation with Countrywide Insurance Group may provide potential earnings and
diversification benefit, success in executing the business plan is a key risk going forward. Moody's added that the group's ability to manage its expenses as it transforms to a smaller, regional writer of affluent personal lines business and its ability to retain existing customers and distributors and write new business will continue to be key rating considerations.
The negative rating outlook reflects the group's weak operating earnings during its transition from a multi line writer to exclusively affluent personal lines and the uncertainty in the run-off of commercial lines loss reserves, as well as the inherent execution risk involved in the recent strategic affiliation with Countrywide Insurance Group. Moody's notes that a demonstrated stability in revenues and earnings (return on policyholder surplus from core operations above 5%), adverse loss reserve development less than 5% of reserves, and expense levels in-line with the significantly reduced business scope (expense ratio in the low 30% range)
could return the company's outlook to stable. Additional drivers of a stable outlook include a successful implementation of the affiliation with Countrywide, coupled with financial leverage in the low 40% range and pretax operating income coverage of interest expense greater than 1x.
Conversely, meaningful adverse reserve development (greater than 5% of reserves), operating losses, a failure to execute the Countrywide transaction, financial leverage above 50%, or pretax operating income coverage of interest expense less than 1x could lead to a ratings downgrade of Atlantic Mutual.
The following ratings were confirmed with negative outlooks:
Atlantic Mutual Insurance Company - surplus notes at B1, insurance financial strength at Baa3;
Centennial Insurance Company - insurance financial strength at Baa3;
ALICOT Insurance Company - insurance financial strength at Baa3.
Atlantic Mutual Companies, based in New Jersey, reported a statutory net loss of $81 million at year-end 2004 and policyholders' surplus of $241.2 m