A.M. Best Places Ratings of Atlantic Mutual Companies Under Review with Negative Implications

A.M. Best Co. has placed the financial strength rating of A- (Excellent) of the Atlantic Mutual Companies (The Atlantic) (New York) under review with negative implications.

Concurrently, A.M. Best has placed the “bbb” debt rating of Atlantic Mutual Insurance Company’s existing $100 million 8.15 percent surplus notes, due Feb. 2028 under review with negative implications.

This action reflects A.M. Best’s heightened concerns regarding The Atlantic’s capitalization and the quality of earnings and surplus, in view of its weak underwriting and operating performance and its use of reinsurance transactions to bolster surplus.

Furthermore, the group has somewhat limited financial flexibility and the potential for continued adverse prior year loss reserve development. Management is pursuing various capital raising alternatives designed to replace soft capital with permanent funds and enhance the quality of surplus and earnings. A.M. Best views the timely execution of this plan as critical. In the event that The Atlantic is unsuccessful, the ratings are likely to be downgraded.

In 2002, The Atlantic purchased an adverse development cover, which allowed the group to increase prior year loss reserves by $86 million and take the benefit of $68.5 million in discounted workers’ compensation and general liability reserves. The Atlantic utilizes quota share and aggregate stop loss reinsurance, which has enabled it to effectively reduce net premium in 2002 and enhance net underwriting results in 1999 and 2000. However, all of these reinsurance agreements included funds held interest expenses and aggregate liability limits. While A.M. Best recognizes the immediate visual benefits gained from these reinsurance transactions, in A.M. Best’s opinion, these reinsurance covers provide temporary surplus relief and will ultimately lessen future earnings.

The financial strength rating of A- (Excellent) has been placed under review with negative implications 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