Elaborating on its rationale to review the ratings for possible downgrade, Moody's noted that the commutation of one of the company's reinsurance agreements will negatively impact statutory surplus by $64.5 million in the third quarter of 2004, as disclosed in the company's second quarter statutory filing.
While Moody's has considered this reinsurance agreement to be a form of debt, due to its retrospective funding nature, and does not consider the commutation a reduction in economic capital, the rating agency believes that the reduction in statutory surplus places the company in a less favorable position with respect to regulatory capital, and thus creates greater regulatory risk. This risk is especially pronounced with respect to the payment of interest on the company's surplus notes, which require regulatory approval. The rating agency also noted that while Atlantic Mutual has replaced its previous reinsurance coverage with another, more comprehensive cover, the new reinsurance agreement requires the company to retain an increased level of adverse loss reserve development risk. In addition, the company has reported significant adverse reserve development over the past several years. During the review process, Moody's will focus on the group's capital adequacy position, its future earnings trends as well as the prospects for its ongoing personal lines business.
With respect to earnings trends, Moody's believes that earnings will continue to be volatile as the company transitions from a multi-line writer to a much smaller personal lines writer. Moody's expects that it will conclude its review upon completion of third party reserve reviews, and after considering the ongoing earnings potential of the group.
The following ratings were placed on review for possible downgrade:
Atlantic Mutual Insurance Company - surplus notes at B1, insurance financial strength at Baa3;
Centennial Insurance Company - insurance financial strength at Baa3;
Atlantic Lloyd's Insurance Company of Texas - insurance financial strength at Baa3.
Atlantic Mutual Insurance Company, based in New York, reported a year to date statutory net loss of $18.1 million as of June 30, 2004 and policyholders' surplus of $322.3 million as of June 30, 2004.
Moody's insurance financial strength ratings are opinions of the ability of insurance companies to punctually repay senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.