A.M. Best Co. has affirmed the financial strength rating (FSR) of B (Fair) and issuer credit ratings (ICR) of “bb+” of First Acceptance Insurance Group (First Acceptance) (Nashville, TN) and its pooled members. Concurrently, A.M. Best has affirmed the ICR of “b” of the group’s ultimate parent holding company, First Acceptance Corporation (Delaware) [NYSE: FAC]. The outlook for all ratings is positive. (Please see below for a detailed listing of the companies.) The rating affirmations primarily are based on First Acceptance’s inconsistent earnings over the last five years, unprofitable operating performance in 2011, concentration of risk in highly competitive non-standard automobile lines and an aggressive growth strategy to increase production during soft market pricing and a low interest rate environment. These negative rating factors are partially offset by First Acceptance’s favorable risk-adjusted capitalization, sound balance sheet liquidity, generally positive earnings and actions taken by management to improve profitability. The group operates under an intercompany pooling arrangement and proportionately shares in the overall underwriting performance of First Acceptance. Earnings over the last five years have been negatively impacted by increased claims severity, higher expenses and a reduction in premium revenue due to the weak economy, competitive pricing and scaling back unprofitable production after a period of rapid growth. Losses in the current year primarily are attributed to higher bodily injury claims, spring and summer storm losses and higher expenses from initiatives put in place to improve pricing and fraud detection, as well as severance pay for several top executives. First Acceptance’s balance sheet is favorable as a result of early capital contributions to support growth over the last five-year period and has been maintained by generally profitable operations over the same period. However, capitalization is expected to weaken; although, should remain supportive of the ratings as the group’s new management initiates an aggressive growth plan over the next few years. A.M. Best is concerned that earnings projections will be challenged if pricing, risk selection and reserving discipline are not maintained, along with growth, during the current competitive, soft non-standard auto market and low interest rate environment.
First Acceptance’s outlook and ratings may come under negative pressure if an unfavorable earnings trend develops and its capital erodes. However, the ratings could benefit from a favorable earnings trend, while maintaining favorable risk-adjusted capitalization.The FSR of B (Fair) and ICR of “bb+” have been affirmed for First Acceptance Insurance Group and its following pooled members:
- First Acceptance Insurance Company, Inc.
- First Acceptance Insurance Company of Georgia, Inc.
- First Acceptance Insurance Company of Tennessee, Inc.