Best’s News & Research Service - May 29, 2015 12:04 PM (EDT)
A.M. Best Affirms Ratings of The American Road Insurance Company
Oldwick //BestWire// - A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit rating of "a" of The American Road Insurance Company (TARIC) (Dearborn, MI). The outlook for both ratings is stable.
The ratings reflect TARIC's excellent capitalization level, history of positive operating performance, conservative reserving practices and effective exposure management. Over the past five years, the company's after-tax five-year return on surplus has averaged 10%, primarily driven by underwriting. TARIC has consistently logged operating income in each of those years. Capital and surplus levels have declined by 7% over the same period; however, this modest decline is primarily attributed to extraordinary dividends of $154 million to its parent over a five-year period that began in 2010. This is reflective of TARIC's established dividend policy, even though TARIC's surplus growth levels have been through the accumulation of net profits. Notwithstanding, there is considerable flexibility in the dividend as evidenced in 2012 and 2013 when no dividend was paid. Additionally, the company continues to maintain an excellent level of capitalization and strong synergies with its ultimate parent, Ford Motor Company (Ford) [NYSE: F].
TARIC is a single parent or pure captive insurer wholly owned by Ford Motor Credit (Ford Credit), which in turn is a wholly owned by Ford. TARIC provides a variety of coverages to its ultimate parent, Ford, and its subsidiaries in the United States and Canada.
Partially, offsetting these positive factors is TARIC's narrow business focus and dependency on Ford's business. Furthermore, its business underwriting results in automotive floorplan is subject to volatility due to weather-related events impacting vehicle inventories, particularly hail and hurricane/catastrophe-related events. Nonetheless, the company's extensive enterprise risk management program that is carried out at its ultimate parent has proven effective at mitigating weather-related losses, resulting in strong underwriting performance year-over-year of more than 15 years with the exception of 2014. An additional offsetting rating factor is the moderate amount of credit risk assumed by TARIC with the placement of reinsurance to an offshore affiliate. However, nearly all of this offshore affiliate's ceded reserves are backed by a trust account with TARIC, which is named as the sole beneficiary.
Somewhat offsetting these positive rating factors are A.M. Best's continuing concerns regarding the operation and profitability of Ford Credit and Ford, as well as the potential impact of these entities on TARIC's operations. Following the 2008 financial crisis, the ratings of TARIC were hampered by the operating challenges of Ford Credit and Ford. Although, this concern has been greatly alleviated in recent years due to Ford's successful implementation of its restructured business plan, continued strong competitive product portfolio (which has resulted in significantly improved financial performance) and credit metrics. Ford's 2014 financial results and enhanced market share are further evidence of its progress toward returning to lower default risk. However, there continues to be market challenges that will need to be overcome, as the market environment remains competitive, capacity is abundant, investment yields are low and global economic uncertainty remains part of the landscape.
TARIC's ratings are well-positioned at the current level, and as a result, upward movement is unlikely over the medium term. Nevertheless, the potential for negative rating actions could occur if volatility in TARIC's operating performance exceeds A.M. Best's expectations and results in a significant prolonged decline in the company's risk-adjusted capitalization. In addition, deterioration in the credit profile of Ford Credit could impact TARIC's ratings.
A.M. Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best's Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive .
The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology .
Key insurance criteria reports utilized:
- Alternative Risk Transfer (ART)
- Catastrophe Analysis in A.M. Best Ratings
- Evaluating Non-Insurance Ultimate Parents
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for Property/Casualty Insurers
This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best's Ratings & Criteria Center.
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