Captive Ratings: American Road, First Beacon, Toyota Motor, Agrinational

June 25, 2008

A.M. Best Co. has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of The American Road Insurance Company (TARIC), but with negative outlooks. “The ratings reflect TARIC’s excellent capitalization level, history of positive operating performance, conservative reserve practices and effective management of exposures,” said Best. “Over the past five years, the after-tax five year return on surplus has averaged 18.2 percent, while capital and surplus levels have grown at a rate of 24.6 percent through the accumulation of net profits.” However, Best expressed concern “regarding the operations and profitability of TARIC’s immediate parent, Ford Motor Credit Company, and its ultimate parent, Ford Motor Company, and the potential impact of these entities on the operations of its captive. An additional offsetting rating factor is the moderate amount of credit risk assumed by TARIC with placement of reinsurance to an offshore affiliate. Although its 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 of ‘B++’ (Good) and the issuer credit rating (ICR) of “bbb+” of First Beacon Insurance Company of Burlington, Vt. with a stable outlook. “The ratings reflect First Beacon’s robust capitalization, very low leverage measures, continued recent favorable operating performance and the strategic role it serves as a captive insurance company for its parent, Alcatel-Lucent primarily for the U.S. exposures of the newly merged company,” Best explained. “These positive rating factors are offset in part by First Beacon’s substantial variation in underwriting income and net income over the past five years. Another offsetting rating factor is the concern over the parent company’s long-term business profile. First Beacon is an insurance company considered bankruptcy remote from Alcatel-Lucent. Nonetheless, its baseline property and casualty book of business volume is dependent in large part on the economic success of Alcatel-Lucent and its affiliates and subsidiaries. A.M. Best notes the strength of the management team, well-developed plans to meet the continuing insurance needs of Alcatel-Lucent and the maintenance of substantial levels of capital within the captive.”

A.M. Best Co. has affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Toyota Motor Insurance Company (TMIC) of Cedar Rapids, Iowa with a stable outlook. “The ratings reflect TMIC’s adequate capitalization and improved operating performance,” Best said. “TMIC’s parent, Toyota Motor Insurance Services, Inc., whose ultimate parent is Toyota Motor Corporation has consistently provided financial support to TMIC in order for it to maintain its current rating level. TMIC plays a strategic role as a provider of vehicle service agreements (VSA) and guaranteed auto protection (GAP) plans to Toyota, Lexus and affiliated dealerships throughout the United States. Partially offsetting these positive rating factors are TMIC’s fluctuating operating results and leverage measures over a five-year period. To improve underwriting results, management instituted rate increases in its VSA program in both 2001 and 2004. GAP rate increases went into effect in 2005. As TMIC’s re-priced policies continue to earn out, results have improved. Beginning in 2005, TMIC changed the payment method of its administrative expenses from up front to as incurred. This change has lowered overall expense ratios.”

A.M. Best Co. has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-“of Vermont-based Agrinational Insurance Company with a stable outlook. “The ratings reflect Agrinational’s strong capitalization, overall favorable operating performance and strategic role as a captive insurer of Archer Daniels Midland Company (ADM),” Best explained. “Net written premium and policyholder surplus each have exhibited significant growth over the last five years due primarily to the growth of ADM. Partially offsetting these favorable rating factors is the high net retention on property exposures, which has produced some variability in operating results. Also, as a single parent captive, Agrinational is exposed to concentration risk since its primary source of business is from one company. It also provides insurance for a limited amount of third-party business sourced through an industry pooling arrangement.”

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