S&P Takes Rating Actions on Farmers Group and

August 14, 2000

Standard & Poor’s removed from CreditWatch and affirmed its ratings on Farmers Group Inc. (FGI) and the interactively rated members of the Farmers Insurance Exchange Intercompany Pool (Farmers).

These ratings had been placed on CreditWatch on Oct. 29, 1999, with negative implications. At the same time, Standard & Poor’s removed from CreditWatch and raised its ratings on Foremost Insurance Co. of Grand Rapids MI and its interactively rated affiliates (collectively, Foremost).

These ratings had been placed on CreditWatch on Oct. 29, 1999, with positive implications. The outlook is stable. Farmers is a mutual organization, writing mainly personal lines automobile insurance.

FGI, which manages Farmers, has been a wholly owned subsidiary of Zurich Financial Services (ZFS, double-‘A’ counterparty credit rating) since September 1998. ZFS is a worldwide holding company with interests in life and nonlife insurance, reinsurance, and asset management. Foremost is 100% reinsured by Farmers.

· Overall, Farmers’s business strategy is strong. An aggressive eastward expansion via independent agents will improve the pool’s geographical spread of risk and broaden distribution channels. The recent acquisition of Foremost augments this move and strengthens coverages by adding a line of business — manufactured housing — in which Farmers had been lightly represented. Farmers’s “life restoration” claims handling strategy provides high value to its customers. · Farmers’s capital adequacy is adequate for the rating based on Standard & Poor’s group rating methodology for a strategically important unit of a flagship company with a double-‘A’-plus financial strength rating.

· Although Farmers had a small pretax statutory operating loss in 1999, which was caused by stringent conditions in the personal lines market, profitability over the past five years has been good.

· Farmers is susceptible to heavy losses from natural events, particularly earthquakes in California and hurricanes and tornadoes in Texas. These are states where Farmers is heavily represented. However, the group is well protected by reinsurance, tailored writings in exposed areas, and membership in state-sponsored loss-mitigation programs.

· Although not the owner of Farmers, FGI has effectively managed it and its stock subsidiaries for many years. Farmers’s policyholders are represented by an elected board of governors. (There are three, one for each exchange.) Standard & Poor’s views the boards as an effective means of communicating policyholder sentiment.

· FGI’s primary source of income is from management fees from the exchanges, but it also gets dividends from its life insurance subsidiary, Farmers New World Life Insurance Co. (double-‘Api’ financial strength rating). Net income generated by this company has averaged $158.6 million over the past five years.

· FGI’s returns over the past five years have been strong and, because they are largely derived from management fees, are not directly dependent on the year-to-year earnings of Farmers. However, over a prolonged period, FGI’s operating results do directly depend on those posted by Farmers.

· FGI’s capital is strong. There is no debt, and the debt-plus-preferred-to-capital ratio is a modest 6.6%. There is no double leverage. Standard & Poor’s believes FGI’s long-term relationship with the exchanges involves a moral commitment to support them financially, as it has done in the past and is currently doing, by purchasing their surplus notes. Standard & Poor’s believes this commitment will be supported by FGI’s financial strength and, if necessary, by that of ZFS as well. The interactively rated members of the Farmers Insurance Exchange Intercompany Pool, Foremost Insurance Co. of Grand Rapids MI, and its interactively rated affiliates are Security Circle insurers, which means that they voluntarily underwent Standard & Poor’s most comprehensive analysis and were assigned ratings in one of the top four categories for financial security.

OUTLOOK: STABLE Standard & Poor’s had placed Farmers and FGI on CreditWatch pending analysis of 1999 earnings and other factors because of the cash terms of the acquisition of Foremost and the stringent conditions in the personal lines insurance market. It believed that this combination could diminish the financial profile of both Farmers and FGI. However, after taking these factors into account, Standard & Poor’s determined that the organizations still met its criteria for the existing ratings. Competition in the personal lines sector remains fierce and could produce an operating loss at a number of large personal lines companies in 2000, including Farmers. However, Farmers will maintain satisfactory earnings and capitalization in the coming year, Standard & Poor’s said.

Topics Agribusiness

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