Best Affirms Members of Farmers Insurance Group Ratings; Outlook Stable

September 3, 2013

A.M. Best Co. has affirmed the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of the members of Farmers Insurance Group and Farmers Reinsurance Company. Best also affirmed the ICR of “a” of Farmers’ management company and attorney-in-fact, Farmers Group Inc. (FGI) as well as the debt ratings on the outstanding surplus notes of Farmers Insurance Exchange and Farmers Exchange Capital.

The outlook for all ratings is stable.

In addition, Best has affirmed the ICR of “bbb” and the debt rating of “bbb” on $100 million 5.9 percent senior notes, due 2013 of FGI subsidiary, Delaware-based 21st Century Insurance Group.

All of the companies are domiciled in Los Angeles, Calif., unless otherwise specified.

The ratings reflect Farmers’ “market leadership position, prudent risk management efforts, solid risk-adjusted capitalization and solid historical operating performance,” best said. “In addition, strategic acquisitions have improved Farmers’ product and geographic diversification, as well as created a multi-channel distribution system with captive agents, independent agents and direct-to-consumer sales.”

As a partial offsetting factor Best cited “Farmers’ variable operating performance due to catastrophe exposure, as demonstrated in the past two years due to a frequency of weather-related events.”

The report noted, however, that “Farmers continues to take considerable measures to enhance its underwriting performance through targeted pricing actions and risk mitigation strategies, strengthened underwriting controls and increased utilization of segmentation.”

Best also explained that the ratings “reflect the group’s strategic importance to Zurich Insurance Group, Ltd.” Collectively, Farmers’ members “are the fourth-largest personal lines insurer in the United States, with a particularly strong market position in the western and southwestern regions,” Best said.

“Although Zurich has no ownership interest in the Exchange, both entities are strategically linked via a management relationship between the Exchange and FGI, Zurich’s wholly owned subsidiary. This linkage provides Zurich with a source of consistent fee income. Given the structural relationship between Zurich and the Exchange,” best said it “deviated from its ‘Rating Members of Insurance Groups’ criteria by providing Farmers with rating enhancement from Zurich.

“As prescribed by the criteria, to be eligible for rating enhancement, an individual company must operate under common ownership, with the entity providing lift or maintaining board control together with common management. However, in this case, FGI, which manages the Exchange and is a wholly owned subsidiary of Zurich Insurance Company, the policyholders essentially own the Exchange. Additionally, the boards of FGI and the Exchange are independent.”

In conclusion Best said: “Future positive rating movement for the insurance operations is contingent upon the establishment and continuation of a positive trend in Farmers’ underwriting results. Conversely, if underwriting results should deteriorate and cause a decline in the organization’s risk-adjusted capitalization, downward rating pressure on the ratings or outlook could be exerted.”

A complete listing of the members of Farmers Insurance Group’s FSRs, ICRs and debt ratings may be obtained from A.M. Best.

Source: A.M. Best

Topics Trends Agribusiness

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