Best Upgrades Fremont Ratings; Affirms Auto Club Group, P/C Members

February 7, 2012

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 Michigan-based Fremont Insurance Company, and has also affirmed the FSR of ‘A’ (Excellent) and ICRs of “a” of The Auto Club Group and its property/casualty members.

However, Best said the outlook for all ratings is negative.

Best explained that it upgraded Fremont’s ratings “based upon it becoming part of The Auto Club Group’s existing reinsurance pooling agreement as of January 1, 2012, following its acquisition by The Auto Club Group on August 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,” Best explained.

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 report continued.

“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 Company in 2009 and Fremont in 2011, it has further diversified its distribution channels and targeted audience in Michigan.”

Best also noted that the Auto Club Group has recently “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.”

As partial offsetting factors Best cited 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.”

Best summarized the companies affected by the rating actions as follows:
The FSR of ‘A’ (Excellent) and ICRs of “a” have been affirmed for The Auto Club Group and its following members:
* Auto Club Insurance Association
* Auto Club Group Insurance Company
* MemberSelect Insurance Company
* Auto Club Property-Casualty Insurance Company
* MEEMIC Insurance Company

Source: A.M. Best

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