Fitch: Alabama-Based Alfa Group’s Ratings Remain on Watch Negative

The expected reduction in policyholders’ surplus when Alfa Mutual Group follows through on its plan to privatize Alfa Corp. later this year caused Fitch Ratings to maintain its negative rating watch on the following ratings of Alfa Group:

Alfa Corp.:

–Issuer Default Rating (IDR) ‘A’;

–Commercial paper ‘F1’;

–$70 million variable-rate note due June 1, 2017 ‘A-‘.

The ‘AA-‘ insurer financial strength (IFS) ratings of the following entities also remain on Rating Watch Negative:

–Alfa Insurance Corp.

–Alfa General Insurance Corp.

–Alfa Mutual Fire Insurance Co.

–Alfa Mutual General Insurance Co.

–Alfa Mutual Insurance Co.

–Alfa Specialty Insurance Corp.

–Alfa Alliance Insurance Corp.

–Alfa Life Insurance Corp.

The privatization of Alfa Corp., in which Alfa Mutual Group purchases the 45 percent share of Alfa Corp. stock that it does not currently own, is expected to close in the second quarter of 2008 at an estimated total cost of $840 million.

Alfa Group’s strong capitalization as measured by absolute dollar, risk-adjusted and operating leverage ratio has historically contributed heavily to its ‘AA-‘ IFS rating. Specifically, Alfa Group’s consolidated statutory surplus is expected to be approximately $1.9 billion at year-end 2007, and the property/casualty group writes at an extremely conservative 50 percent premium-to-surplus ratio.

In addition to traditional ratio analysis, Fitch will utilize its stochastic economic capital model, Prism, to assess Alfa’s proforma capital position. This determination of Alfa’s capitalization relative to its rating category will be a key element in resolving the Negative Watch.

In Fitch’s view, however, the cost of the privatization will likely eliminate Alfa Group’s over capitalized position. The probable result at the close of the privatization transaction will be a one-to-two notch downgrade.

Historically, Alfa group has been challenged by below average profitability and elevated catastrophe risk due to the lack of geographic diversification. The homeowners book of business has suffered more than the auto line of business. Consequently, Alfa has shown an improved profile in 2007 given rate increases, wind exclusion on coastal properties and increased wind deductibles on homeowners insurance policies.

Source: Fitch Ratings

Topics Alabama