Despite the fact that the A rating of Dearborn, MI-based The Auto Club Group has been affirmed by A.M. Best, and by the upgrade from A- to A of the rating for Fremont Insurance Co., also of Michigan, A.M. Best says that the outlook for these ratings is actually negative.
Why?
Well, Fremont’s rating was largely because it recently became part of The Auto Club Group’s existing agreement to pool reinsurance, as part of the former company’s acquisition by the latter last August.
But then, there’s the off-set: The Auto Club Group’s earnings have been gradually deteriorating over the last several years, partly because of poor underwriting decisions, and partly because of the inflated cost of medical treatment having a significant effect on the size of personal injury auto claims.
The ratings for the larger company reflect a combination of factors: its established position as an insurance leader in the state of Michigan, its modest five-year performance, its strong risk-adjustment capitalization, and the benefits it has gleaned from selling its products to AAA members.
Nevertheless, A.M. Best looks at The Auto Club Group and sees a company that has most of its business in a single state, which means any change in local insurance law could directly impact business. It sees that there’s a lot of competitive pricing among other companies in the Michigan insurance market, and the waning operating results don’t help.
For this reason, analysts say, even with an A rating, the overall outlook is negative.
Partially offsetting these strengths is The Auto Club Group’s deterioration in operating results in recent years and its concentration of business in one state, which exposes it to regulatory and legal changes, as well as significant price competition in its core markets. The deterioration in operating results in recent years was driven by increased underwriting losses and lower investment income, as well as the group’s exposure to regulatory and legal changes in Michigan.