AM Best Affirms Credit Ratings of First Acceptance Corporation and Its Subsidiaries

AM Best has affirmed the Financial Strength Rating (FSR) of C++ (Marginal) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “b+” (Marginal) of the subsidiaries of First Acceptance Corporation (Delaware) [OTCQX: FACO], collectively referred to as First Acceptance Group (First Acceptance). The outlook for the FSR is stable while the outlook for the Long-Term ICR is negative. (See below for a list of companies). Concurrently, AM Best has affirmed the Long-Term ICR of “ccc-” (Weak) of First Acceptance Corporation. The outlook of this Credit Rating (rating) is negative.

The ratings reflect First Acceptance’s balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, limited business profile and marginal enterprise risk management.

The rating affirmations reflect First Acceptance’s balance sheet strength assessment, which is viewed as weak. This position is supported by risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), which remains at the weak level due to underwriting leverage metrics that are significantly elevated when compared with the private passenger nonstandard auto composite and the group’s propensity to dramatically grow the book. Despite organic surplus growth in 2023, which was enhanced by a capital contribution following the sale of First Acceptance Corporation’s retail agency operation, the capital position remains highly sensitive to elevated premium and reserve leverage relative metrics. The negative outlook on the Long-Term ICRs reflect weak key balance sheet strength metrics and premium growth above industry thresholds that continue to negatively influence risk-adjusted adjusted capitalization. While management continues to focus on improved underwriting leverage through continued capital-raising efforts and pricing initiatives, these actions have not yet gained sufficient traction.

First Acceptance’s operating performance remains marginal due to volatility in underwriting results largely attributed to physical damage severity trends as well as continuing inflationary and supply chain economic conditions that have elevated vehicle repair costs. This position is partially offset by a material decline in the mix of full-coverage polices. In 2023, the rebound in performance reflected positive earnings that benefited from robust growth in premium and service fee income associated with the nonstandard auto business. The limited business profile reflects First Acceptance’s product and geographic concentrations, which are largely focused on nonstandard auto business that has a history of volatility due to efforts to maintain rate adequacy and competitive market conditions. Results in recent years have been further pressured by physical damage severity trends, as well as continuing inflationary, supply chain and economic conditions that have elevated vehicle repair costs.