MOODY'S ASSIGNS A2 RATING TO $650 MILLION TRUST SURPLUS NOTES OFFERING TO BE ISSUED BY FARMERS EXCHANGE CAPITAL
New York, 07-02-98 -- Moody's Investors Service has assigned an A2 rating to $650 million of trust surplus notes to be issued by Farmers Exchange Capital, a financing vehicle for the Farmers Insurance Exchange, Truck Insurance Exchange, and Fire Insurance Exchange; and an A2 rating to the underlying exchange surplus notes to be issued to the trust in connection with the financing. The proceeds from the offering are to be utilized to repay approximately $650 million of outstanding certificates of contribution previously issued to the management company, Farmers Group, Inc.
According to Moody's, these ratings reflect the Farmers' well established position within personal lines insurance in the United States. Moody's noted that these businesses have shown solid profitability in recent years, reflecting improving underlying loss trends and a lack of major natural catastrophes. The decrease in direct exposure to California earthquakes over the past few years, through various mechanisms, has also helped to improve the group's business profile. Further, the rating agency noted that Farmers' exclusive agency distribution system has provided the insurer with a sustained competitive advantage over time.
Moody's stated that its ratings of various members of the Farmers Insurance Group of Companies consider, to a degree, the group's anticipated affiliation with Zurich Insurance Company (insurance financial strength Aa1), and the group's perceived strategic importance to the new enterprise. Nevertheless, Moody's added, the relative size of the merging entities, and the management philosophy of Zurich, to run the insurance businesses as quasi-autonomous business units, limits the support that may be imputed from Zurich to Farmers. Moody's also commented that this operating practice, combined with the absence of overlap among the two main business units will make it difficult to realize substantial merger synergies, either through cost savings or cross-selling. Nevertheless; Moody's acknowledges management's intentions and initiatives to achieve operating and revenue synergies and will follow closely the operating performance of these business units for evidence of management's success.
The Farmers organizational structure is unique. At the core of the organization is a collection of reciprocal insurance exchanges and their affiliates, led by Farmers Insurance Exchange, Truck Insurance Exchange, and Fire Insurance Exchange, each rated Aa3 for insurance financial strength. These reciprocals, which are owned by their policyholders, receive management services from Farmers Group, Inc., under a contractual arrangement with the policyholders which provides this management company with fee income that is based primarily on the business volume of the exchanges. One of the implications of this organizational structure is that the insurance exchanges cannot be funded in the same way as many of their peers, through equity capital contributions. Instead, the exchanges have relied historically on certificates of contribution (surplus notes), to provide a material portion of their statutory capital over time.
Moody's considers third party surplus notes to provide the Exchanges with somewhat less financial flexibility than do contribution certificates provided by affiliates, despite similar legal standing. However, the rating agency noted that the continuing strong economic linkage between the Exchanges and the management company, Farmers Group, Inc., provides some measure of additional support. The group also includes a life insurer, Farmers New World Life Insurance Company (insurance financial strength of Aa3), which is wholly owned by Farmers Group, Inc. and sells its products through the Farmers' agents.
These securities are to be sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance has been designed to permit resale under Rule 144A.
Farmers Group, Inc. is an insurance holding company located in Los Angeles, California whose principal operations involve providing management services to reciprocal property and casualty insurance exchanges and operating its wholly-owned life insurance company. For the first quarter of 1998, Farmers Group, Inc. reported net income of $155 million and stockholder's equity of approximately $6.9 billion as of March 31, 1998.
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