A.M. Best Downgrades Affirmative Insurance Holdings, Subsidiaries

A.M. Best Co. has downgraded the financial strength rating (FSR) to B- (Fair) from B (Fair) and issuer credit ratings (ICR) to “bb-” from “bb+” of Affirmative Insurance Group and its members.

A.M. Best also downgraded the ICR to “ccc+” from “b” of the parent company, Affirmative Insurance Holdings Inc. (Affirmative), headquartered in Addison, Texas. The outlook for all ratings has been revised to negative from stable.

The downgrades are based on the group’s weakened capital position and recent unfavorable underwriting results.

The group’s underwriting performance in recent years has been severely impacted by increased losses mainly from adverse reserve development on prior accident years from its Florida operations. In response, the group entered into a sale/leaseback transaction in May 2010 to improve its surplus position by approximately $28 million and began to issue notices of non-renewal to insured customers in Florida.

Through first quarter 2010, although slightly improved over the prior year, the group’s loss and loss adjustment expenses were adversely impacted by the recent change in business mix due to growth in Texas and Michigan, which operate at higher loss ratios than core business.

The ratings also consider the elevated tangible financial leverage of Affirmative.

Although non-regulated insurance subsidiaries generate adequate cash flow to service debt obligations, there is potential pressure on the parent’s insurance subsidiaries to provide dividends for debt servicing or other holding company obligations. However, the group currently cannot pay any dividends without prior regulatory approval due to a negative unassigned surplus position.

The negative outlook reflects the potential for continued deterioration in the group’s capital position based on its current business plan and the ongoing challenges of the highly competitive non-standard personal automobile market.

A.M. Best acknowledges that management has taken steps to improve profitability as reflected by Affirmative’s recent withdrawal from the Florida market, along with other expense savings initiatives. However, the ratings remain under pressure pending sustained improvement of the group’s earnings and risk-adjusted capitalization.

The FSR has been downgraded to B- (Fair) from B (Fair) and the ICRs to “bb-” from “bb+” for Affirmative Insurance Group and its following members:

Affirmative Insurance Company; Insura Property and Casualty Insurance Company Inc.; Affirmative Insurance Company of Michigan; USAgencies Casualty Insurance Company Inc.

Source: A.M. Best