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Rating Action:

MOODY'S REVISES FARMERS OUTLOOK TO NEGATIVE; INSURANCE FINANCIAL STRENGTH RATINGS OF Aa3 CONFIRMED

21 Jun 2001
MOODY'S REVISES FARMERS OUTLOOK TO NEGATIVE; INSURANCE FINANCIAL STRENGTH RATINGS OF Aa3 CONFIRMED

Approximately $1.5 Billion of Rated Securities Affected

New York, June 21, 2001 -- Moody's Investors Service has revised its rating outlook on the Farmers Insurance Exchanges to negative from stable. The negative outlook applies to the Aa3 insurance financial strength ratings of Farmers, Fire, and Truck Insurance Exchange (collectively, "the Exchanges) as well as to Farmers Insurance Company of Oregon. The negative outlook also extends to the surplus notes issued by Farmers Exchange Capital and rated A2 by Moody's, as well as the "a1" rated QUIPs issued by funding subsidiaries of Farmers Group, Inc. (FGI). The Aa3 insurance financial strength rating of Farmers New World Life Insurance Company, the life insurance subsidiary of Farmers Group, Inc., has been confirmed with a stable outlook.

Commenting on its change in outlook, Moody's noted that internal capital generation at the Exchanges has been constrained by statutory operating losses in each of the past two years. Concurrently, the levels of operating and financial leverage have increased to points not typically associated with the company's current ratings. Moody's also noted that future profitability at the Exchanges will depend not only on the successful implementation of rate increases in its automobile and homeowners lines of business, but also on successful operational changes (currently underway) in the agency underwriting and claims areas. Shortcomings in these areas have affected primarily the homeowners' line of business. In Moody's opinion, the benefits of the changes already underway in these two areas are somewhat less certain and may be slower to materialize than earnings pressures which can be more readily addressed through rate actions alone.

Expanding on its change in outlook, Moody's noted that the quality of the company's surplus, which has grown in the past few years in large part through appreciation in investments and the issuance of surplus notes, has lessened at a time when the company's current and anticipated future premium writings show meaningful increases. Moody's commented further that the balance sheet strength of the Exchanges, while still good, has, in the eyes of the rating agency, weakened in the recent past. In addition to the changes in the capital structure, for example, Moody's estimates that the recent historical levels of redundancies in the company's loss reserve position are not likely present in the company's current loss reserves. While this theme is prevalent throughout the industry, it places particular importance on the profitability of current business and the actions being undertaken to improve the financial results.

Tempering these negative trends, Moody's noted that Farmers has taken corrective underwriting, pricing, and claims action. The benefits of these actions should begin to impact the company's bottom line later in 2001 and in 2002.

Commenting on the securities affected by the outlook change, the rating agency noted that the surplus notes are direct obligations of the Exchanges. Consequently, a change in the perceived credit quality of the Exchanges has a direct impact on the rating and outlook of the surplus notes. The QUIPs, which are obligations of FGI, have also had their outlook changed to negative from stable. Moody's noted that FGI's long-term financial prospects are integrally tied to the financial strength of the Exchanges. Further, profits from management fees charged to the Exchanges account for around 70% of the profits at FGI. As a result, the debt capacity of FGI will be affected by the credit quality of the Exchanges, despite the lack of ownership or underwriting risk taken on by FGI.

The negative outlook applies to the following rated companies and securities:

Farmers Insurance Exchange; Insurance Financial Strength Rating of Aa3;

Farmers Insurance Company of Oregon, Insurance Financial Strength Rating of Aa3;

Fire Insurance Exchange; Insurance Financial Strength Rating of Aa3;

Truck Insurance Exchange; Insurance Financial Strength Rating of Aa3;

Farmers Group Capital; QUIPs rated "a1"

Farmers Exchange Capital; Surplus Notes rated A2.

The following company has had its rating confirmed with a stable outlook:

Farmers New World Life Insurance Company; Insurance Financial Strength Rating of Aa3;

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
Vice President - Senior Analyst
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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