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A.M. Besthas downgraded the financial strength rating (FSR) to B++ (Good) from A- (Excellent) and the issuer credit rating (ICR) to “bbb+” from “a-” of Financial American Property and Casualty Insurance Company (FAMPAC) , Kerrville, Texas.

The outlook for the ICR was revised to negative from stable while the outlook for the FSR remains stable.

The downgrade reflects deterioration in FAMPAC’s underwriting results, with both underwriting and operating losses reported annually since 2011. Such losses accelerated during 2015, resulting in capital erosion of nearly 11 percent.

The principal driver of these losses has been the company’s lack of scale and heavy expense structure, despite management’s efforts to reduce overhead costs in recent years. This lack of scale has, in turn, been due to the company’s inability to gain traction in the marketing of its products through its affiliate, Interstate National Dealer Services Inc. (INDS). Consequently, the execution risk associated with the planned growth in contracts to be written over the near term remains.

The company’s largest line of business is long-duration contract liability insurance policies covering underlying vehicle service contracts (VSC) written by INDS. FAMPAC also issues mechanical breakdown insurance policies for INDS in states that require an admitted insurance carrier to issue VSC coverages.

The negative outlook for the ICR reflects A.M. Best’s expectation that FAMPAC will continue to be challenged to produce a material improvement in operating earnings during 2016 and 2017.

The stable outlook on the FSR reflects A.M. Best’s comfort level regarding FAMPAC’s risk-adjusted capitalization.

Source: A.M. Best

Topics Property Property Casualty Casualty