Ratings Recap: American Road, DHC, National Lloyds

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb” of Michigan-based The American Road Insurance Company (TARIC). The outlook for the FSR is stable, while the outlook for the ICR has been revised to stable from positive. Best noted that TARIC’s “capitalization and operating performance has been and continues to be robust.” However, its ratings are the result of its immediate parent, Ford Motor Credit Company LLC and ultimate parent, Ford Motor Company’s operating challenges, which “act as a constraint on TARIC’s rating profile. Nevertheless, TARIC’s rating upgrades reflect Ford’s successful implementation of its restructured business plan. Ford’s full-year 2010 financial results and increased market share act as evidence to support the company’s progress toward returning to lower default risk.” Best also indicated that the ratings reflect 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 over 18 percent and has consistently logged operation income in each year. Capital and surplus levels have declined 31.3 percent over the same period. The decline is primarily attributed to an extraordinary dividend of $468 million to Ford Credit over the same period, reflective of TARIC’s established 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. As partial offsetting factors Best cited its “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 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.”

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘B-‘ (Fair) and issuer credit ratings (ICR) of “bb-” of Long beach, Calif.-based DHC Group and its members. The outlook for all of the ratings is stable. “Ultimate financial control of DHC and its members rests with Covanta Holding Corporation, a publicly held company that is primarily involved in the waste disposal and energy services industry,” Best pointed out. The ratings reflect DHC’s “continued unfavorable operating performance and decline in policyholder surplus.” However, “management’s initiatives to improve operating income through a focus on its surety and specialty automobile books of business,” somewhat offset these concerns,” said Best. “DHC’s significant underwriting losses over several years are primarily the result of adverse loss reserve development from its run-off lines of business and an elevated underwriting expense ratio. As a result of substantial operating losses, surplus has deteriorated considerably from historical levels. To address the group’s adverse loss reserve deficiencies and loss of capital, Covanta has contributed $12.5 million to DHC since 2008. This continued financial support is contemplated in DHC’s current ratings. In response to DHC’s adverse results, management has undertaken several initiatives including withdrawal from non-core lines of business and various states, with rate revisions and agency management for its continued lines of business. The rating actions also apply to National American Insurance Company of California and Danielson National Insurance Company, who are members of the DHC Group

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and issuer credit rating (ICR) of “a+” of Texas-based National Lloyds Insurance Company, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of American Summit Insurance Company, and the ICR of “bbb+” of Hilltop Holdings Inc. (HTH). National Lloyds and American Summit are subsidiaries of HTH. The outlook for all ratings is stable. Best noted that HTH currently operates as a public holding company that is endeavoring to make opportunistic acquisitions on an ongoing basis. The ratings of National Lloyds reflect its solid risk-adjusted capitalization, favorable operating earnings in recent years and local market expertise within its niche of the personal property insurance market. These positive rating factors are somewhat offset by National Lloyds’ geographic concentration of risk primarily in the Texas marketplace, with susceptibility to frequent and severe weather-related events. This was evidenced during 2008 and 2009 when multiple hurricane and tornado/hail events negatively impacted underwriting results. However, National Lloyds continues to improve its underwriting guidelines in an effort to reduce inherent risk. The ratings of American Summit recognize its solid risk-adjusted capitalization and favorable operating performance. These positive rating factors are somewhat offset by American Summit’s geographic concentration of risk and limited product offerings, as primarily a provider of insurance for the mobile home market. As a result, American Summit’s underwriting performance is susceptible to the frequency and severity of localized storm activity. This was evidenced in 2010 as a large hailstorm in Arizona negatively impacted underwriting results. However, American Summit maintains a prudent catastrophe reinsurance program in conjunction with its affiliate company, National Lloyds, to mitigate losses associated with severe weather-related catastrophe events.”