A.M. Best Co. has downgraded the financial strength rating to ‘C+’ (Marginal) from ‘C++’ (Marginal) and issuer credit rating to “b-” from “b” of Baltimore-based Interstate Auto Insurance Company, Inc., and has assigned a negative outlook to both ratings.
The rating actions reflect Interstate Auto’s “continued negative underwriting performance, which could not be offset by its generally declining investment income,” Best explained.
“This has led to pre-tax operating losses in each of the past five years, and consequently, has hindered the company’s surplus base. As of year-end 2011, Interstate Auto’s surplus base was only slightly above Maryland’s minimum surplus requirements for companies writing private passenger non-standard auto business.”
Best’s bulletin also indicated that “weak economic conditions, including high unemployment, have led to cancellations of coverage, and therefore, a declining trend in Interstate Auto’s premium writings since 2009, resulting in high expense ratios and weakening underwriting results.”
On a more positive note, Best pointed out that despite the declining premium trend, “the company’s premium and underwriting leverage ratios, while decreasing over the past three years, still remain relatively high compared to its peers. While Interstate Auto is taking steps such as exploring additional sources of capital and instituting rate increases to improve profitability in order to restore its surplus base, the current soft underwriting cycle in its line of business represents a challenging operating environment for the insurer.
“Further downward movement in the ratings as indicated by the negative outlook could occur should there be continued deterioration in Interstate Auto’s risk-adjusted capitalization and/or a continuation of the negative operating performance trend.
“While upward movement in the ratings is unlikely in the near term, any eventual improvement in the ratings and/or outlook will require significant improvement in the company’s capitalization along with a turnaround in its underwriting performance and operating results.”
Source: A.M. Best