A.M. Best Affirms Ratings of The American Road Insurance Company
May 29 2015 - 12:32PM
Business Wire
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.
A.M. Best Company is the world's oldest and most
authoritative insurance rating and information source. For more
information, visit www.ambest.com.
Copyright © 2015 by A.M. Best Company,
Inc. ALL RIGHTS RESERVED.
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version on businesswire.com: http://www.businesswire.com/news/home/20150529005809/en/
A.M. BestAlexander SarfoSenior Financial
Analyst908-439-2200, ext.
5779alexander.sarfo@ambest.comorJohn
AndreGroup Vice President908-439-2200, ext.
5619john.andre@ambest.comorChristopher
SharkeyManager, Public Relations908-439-2200, ext.
5159christopher.sharkey@ambest.comorJim
PeavyAssistant Vice President, Public
Relations908-439-2200, ext.
5644james.peavy@ambest.com
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