Fremont Insurance Co. Ratings Upgraded; Auto Club Group Affirmed

A.M. Best Co. has upgraded the financial strength rating (FSR) to A (Excellent) from A- (Excellent) and issuer credit rating (ICR) to “a” from “a-” of Fremont Insurance Co. (Fremont) of Fremont, Mich. In addition, A.M. Best has affirmed the FSR of A (Excellent) and ICRs of “a” of The Auto Club Group, Dearborn, Mich. and its property/casualty members.

The outlook for all ratings is negative.

The upgrading of the ratings for Fremont is based upon it becoming part of The Auto Club Group’s existing reinsurance pooling agreement as of Jan. 1, 2012, following its acquisition by The Auto Club Group on Aug. 1, 2011.

The negative outlook is based upon the deterioration in The Auto Club Group’s operating earnings in recent years, which was driven by unfavorable underwriting results caused by homeowners’ weather-related losses and medical inflation on auto personal injury claims.

The Auto Club Group’s ratings reflect its strong risk-adjusted capitalization, modest five-year operating performance and well-established position as a personal lines market leader in Michigan, as well as the benefits derived from offering insurance products to AAA members.

The group’s strong risk-adjusted capitalization is driven by its moderate underwriting leverage, partially offset by its above average non-affiliated investment leverage and moderate gross and net catastrophe exposure.

The Auto Club Group has produced modest five-year operating earnings, driven by solid investment income, partially offset by underwriting losses for the same period.

These positive attributes are derived from The Auto Club Group’s AAA affiliation, through which it writes a controlled book of business with a select class of policyholders. The success of this book is reflected in its large market share in Michigan.

Management remains focused on improving its competitive position in Michigan, and by acquiring MEEMIC Insurance Co.in 2009 and Fremont in 2011, it has further diversified its distribution channels and targeted audience in Michigan.

Recently, The Auto Club Group also implemented numerous strategic initiatives to improve underwriting performance, which included private passenger auto and homeowners’ rate adjustments in states where they were indicated, increasing product and underwriting sophistication to improve profitability and its competitive position, as well as continued rollover of a new claims system.

Partially offsetting these strengths is The Auto Club Group’s deterioration in operating results in recent years and its concentration of business in one state, which exposes it to regulatory and legal changes, as well as significant price competition in its core markets. The deterioration in operating results in recent years was driven by increased underwriting losses and lower investment income, as well as the group’s exposure to regulatory and legal changes in Michigan.

The deterioration in underwriting results is reflective of a higher loss and loss adjustment expense ratio, which is driven by an increased frequency and severity of homeowners’ weather losses throughout the Midwest, and greater private passenger auto personal injury loss cost severities primarily due to medical inflation and unfavorable loss experience for non-Michigan business. In addition, before cost reduction efforts took effect in 2009, The Auto Club Group had an above average underwriting expense ratio, reflective of significant price competition, system development and implementation costs for new underwriting and policy administration systems, as well as higher advertising costs as competition increased.

As The Auto Club Group currently maintains a negative rating outlook, negative rating actions could occur from the continuation of adverse operating performance that has been reported in recent years, driven by severe weather-related losses and unfavorable automobile liability loss experience.

Source: A.M. Best

Topics Auto Profit Loss Underwriting Michigan