22 August 2016USA analysis

AM Best affirms ratings of Ford Motor-owned captive insurer

AM Best has affirmed the financial strength rating of A (Excellent) of The American Road Insurance Company (TARIC), a pure captive insurer wholly owned by Ford Motor Credit Company, which is an indirect wholly-owned subsidiary of Ford Motor Company.

The outlook for the rating is stable, and, according to AM Best, reflects TARIC’s excellent capitalisation level, history of positive operating performance, conservative reserving practices and effective exposure management.

“Over the past five years, the company’s after-tax five-year return on surplus has averaged nearly 9 percent, primarily driven by profitable underwriting and realised capital gains supplementing investment income. TARIC has consistently logged operating income in each of the past five years,” said AM Best.

TARIC provides a variety of coverages to Ford and its subsidiaries in the United States and Canada, primarily automobile floor plan collateral protection, inland marine, extended service business and commercial auto liability.

According to AM Best, TARIC’s extensive enterprise risk management program, which is carried out at its ultimate parent, has proven effective at mitigating weather-related losses, resulting in strong underwriting performance over the most-recent five-year period.

However, narrow business focus and dependency on Ford’s business have partially offset TARIC’s positive ratings.

The underwriting results for TARIC’s automotive floor plan business is also subject to volatility due to events that may impact vehicle inventories, such as severe weather.

Furthermore, capital and surplus levels have declined over the last five years, primarily attributed to extraordinary dividends to its parent.

The ratings agency said there is considerable flexibility in the dividend, as evidenced in 2012 and 2013 when no dividend was paid.

An additional offsetting rating factor is TARIC’s dependence on reinsurance to protect surplus. However, the credit risk associated with this is mainly offset by collateral held in trust.

“While the current ratings or outlooks are not expected to change in the near term, significant deterioration in operating performance may result in downward movement in the ratings or outlooks. In addition, significant erosion in risk-adjusted capitalization levels may result in negative rating action,” AM Best continued.