OLDWICK, N.J.--(BUSINESS WIRE)--
A.M. Best Co. has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of The American Road Insurance Company (TARIC) (Dearborn, MI). The outlook for both ratings is stable.
TARIC’s capitalization and operating performance has been and continues to be robust. The ratings of TARIC have been hampered by the operating challenges of its immediate parent, Ford Motor Credit Company LLC (Ford Credit), and its ultimate parent, Ford Motor Company (Ford) [NYSE: F], following the 2008 financial crisis. The ratings of TARIC have improved considerably in recent years due to Ford’s successful implementation of its restructured business plan, continued strong competitive product portfolio, which has resulted in significantly improved financial performance, and credit metrics. Ford’s 2012 financial results and market share are further evidence of its progress toward returning to lower default risk.
The ratings also recognize TARIC’s excellent capitalization level, history of positive operating performance, conservative reserve practices and effective management of exposures. Over the past five years, the company’s after-tax five-year return on surplus has averaged 14%, and it has consistently logged operating income in each year. Capital and surplus levels have declined 42% over the same period. The decline is primarily attributed to dividends of $304 million to Ford Credit over a five-year period beginning in 2008, reflective of TARIC’s dividend policy. However, TARIC’s surplus growth levels have been through the accumulation of net profits, and the company continues to maintain an excellent level of capitalization.
Partially offsetting these positive rating factors are A.M. Best’s concerns regarding the operation and profitability of Ford Credit and Ford and the potential impact of these entities on the operations of TARIC. An additional offsetting rating factor is the moderate amount of credit risk assumed by TARIC with the placement of reinsurance to an offshore affiliate. Although TARIC’s ceded leverage is well above that of its peer companies, nearly all of its ceded reserves are backed by a trust account with TARIC named as the sole beneficiary.
TARIC’s ratings are well positioned at the current level, and as a result, upward movement is unlikely over the medium term. Nevertheless, the potential for negative rating actions could result if volatility in TARIC’s operating performance exceeds A.M. Best’s expectations and results in a significant prolonged decline in its risk-adjusted capitalization. In addition, deterioration in the credit profile of Ford Credit could impact TARIC’s ratings.
A.M. Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world.
For current Best’s Credit Ratings and independent data on the captive and alternative insurance market, please visit www.ambest.com/captive.
The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.
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