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Rating Action:

MOODY'S DOWNGRADES FARMERS INSURANCE EXCHANGE FINANCIAL STRENGTH RATINGS TO A1 AND SURPLUS NOTES TO Baa1, RATINGS CONTINUE UNDER REVIEW

27 Nov 2001
MOODY'S DOWNGRADES FARMERS INSURANCE EXCHANGE FINANCIAL STRENGTH RATINGS TO A1 AND SURPLUS NOTES TO Baa1, RATINGS CONTINUE UNDER REVIEW

Approximately $1.5 Billion of Debt Securities Affected.

New York, November 27, 2001 -- Moody's Investors Service has downgraded several ratings of Farmers Insurance Exchanges and the quarterly income preferred (QUIP) securities issued by Farmers Group Inc., a U.S. subsidiary of the Zurich Financial Services Group. The insurance financial strength ratings of Farmers Insurance Exchanges were downgraded to A1 from Aa3 and the surplus notes of the Exchanges were downgraded to Baa1 from A2. Both ratings were left on review for possible further downgrade. The ratings on the QUIP securities issued by funding subsidiaries of Farmers Group, Inc. were downgraded to A3 from A2. These securities also remain on review. The Aa3 financial strength rating of Farmers New World Life Insurance Company, the life insurance subsidiary of Farmers Group, Inc. was placed on review for possible downgrade.

Commenting on its downgrade of the insurance financial strength ratings of the company's property/casualty subsidiaries, Moody's noted that Farmers' Insurance Exchanges have reported statutory losses for each of the past two years and sizable losses have continued through the first nine months of 2001. These losses, combined with financial market losses in the company's appreciable equity investments have driven surplus to levels that were inconsistent with its previous rating. Moody's also noted that the decline in statutory surplus levels at the Exchanges highlight its exposure to catastrophe losses, which although heavily reinsured remain meaningful, in Moody's opinion, on both a gross and a net basis.

Moody's commented that its continuing review of Farmers Insurance Exchanges' insurance financial strength ratings will focus largely on operating performance. The company has implemented a significant number of pricing, underwriting and claims handling improvements which should begin to impact its bottom line in the near future. However, the rating agency commented that its review could result in further downgrades in the absence of improvement that meets or exceeds current expectations. Also factoring into the ongoing review will be the group's plans for growth, loss reserve adequacy, catastrophe management, and ongoing financial relationships between the insurance Exchanges and Farmers Group, Inc. Moody's expects that its review will conclude in the first quarter of 2002.

The rating agency went on to explain its downgrade and continuing review of the surplus notes. The rationale, Moody's noted, was similar to that of the financial strength rating since these securities are obligations of the Exchanges. These ratings were downgraded an additional notch to reflect their subordination relative to senior policyholder claims, the particularly weak earnings coverage measures, rising financial leverage, and Moody's notching convention.

Lastly, Moody's expanded on its various ratings associated with Farmers Group, Inc. The company's subordinated debt instruments, QUIPS, now rated A3 were downgraded because of the weakening support of the property/casualty exchanges. Nevertheless, the QUIPS benefit from the earnings of Farmers Group, Inc.'s life insurance subsidiary and unlike the surplus notes of the Exchanges, they are issued by a vehicle that is ultimately owned by Zurich Financial Services. The resolution of the rating review on Farmers New World Life Insurance Company will depend in part on an evaluation of the company on a stand alone basis and also on the resolution of the rating review of the property/casualty Exchanges. Finally, Moody's commented that the A1 ratings of the Zurich RegCap Trusts continue on review for possible downgrade in association with the resolution of the ratings at Zurich Financial Services which were previously placed on review.

In summary, the following rating actions have been taken:

Farmers Insurance Exchange; Insurance Financial Strength Rating to A1, continuing review;

Farmers Insurance Company of Oregon, Insurance Financial Strength Rating to A1, continuing review;

Fire Insurance Exchange; Insurance Financial Strength Rating to A1, continuing review;

Truck Insurance Exchange; Insurance Financial Strength Rating to A1, continuing review;

Farmers Group Capital; QUIPs to A3, continuing review;

Farmers Exchange Capital; Surplus Notes to Baa1, continuing review

Farmers New World Life Insurance Company; Insurance Financial Strength Rating of Aa3 placed on review for possible downgrade;

Farmers Group, Inc., located in Los Angeles, California, is a subsidiary of Zurich Financial Services Group, a global financial services organization located in Zurich, Switzerland. FGI, in turn, provides management services to (though it does not own) the Insurance Exchanges. The Exchanges, collectively, are leading writers of personal insurance products in the United States. Collectively, the Farmers' Exchanges wrote in excess of $10 billion in net premiums in 2000. Farmers New World Life Insurance Company, which is owned by FGI, writes primarily individual life insurance and annuity policies.

New York
William M. Wilt
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Ted Collins
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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