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A.M. Best Revises Outlook To Stable For First Acceptance Corporation And Its Subsidiaries

A.M. Best Co. has revised the outlook to stable from positive and affirmed the financial strength rating (FSR) of B (Fair) and issuer credit ratings (ICR) of “bb+” of the pooled subsidiary members (First Acceptance) of First Acceptance Corporation (Delaware) [NYSE: FAC]. Concurrently, A.M. Best has revised the outlook to stable from positive and affirmed the ICR of “b” of First Acceptance Corporation. (See below for a detailed listing of the companies.)

The ratings of First Acceptance are based upon unfavorable operating performance in recent years; concentration of risk in private passenger non-standard auto lines; and challenging economic conditions compounded by a below average interest rate environment. These negative factors are offset in part by strong risk-adjusted capitalization and sound balance sheet liquidity along with action being taken to improve earnings.

Losses in recent years have been negatively impacted by increased claims severity, storm losses and higher expenses, as well as declining revenue from premium writings, investment income and other income items. Premium volume and additional fees charged to policyholders were down due to scaling back production and the weakened economy. Investment income was lower from reductions in invested assets and low interest rates.

Capitalization remains more than supportive of the ratings but has weakened in recent years. First Acceptance Corporation contributed nearly $13.1 million of additional capital to the insurance operations in September 2012. This was to partially offset a reduction in surplus primarily due to operating losses in 2011 and 2012 as well as a dividend paid in 2011 to buy back shares. In addition, management has taken a number of actions to improve earnings, primarily by raising rates, closing under-performing retail stores and improving claims handling and underwriting. However, capitalization may continue to weaken as management executes an aggressive growth plan over the next couple of years. The ratings may be further stabilized by a return to a profitable operating trend that leads to capital appreciation; however, the ratings may be downgraded by further weakening in risk-adjusted capitalization.

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