New York, October 25, 2018 -- Moody's Investors Service ("Moody's") has affirmed
the A2 insurance financial strength (IFS) rating and the Baa2 (hyb) surplus
note rating of Farmers Insurance Exchange, a reciprocal insurance
exchange and the lead member of Farmers Insurance Group (Farmers).
Moody's also affirmed the A2 IFS ratings of other members of the
Farmers intercompany pool.
In addition to Farmers Insurance Exchange, Farmers encompasses Fire
Insurance Exchange, Truck Insurance Exchange and Mid-Century
Insurance Company, among other affiliated insurers. The Exchanges
are managed by Farmers Group, Inc. (FGI), an unaffiliated
management company owned by Swiss-based Zurich Insurance Group
(Zurich), whose lead operating company is Zurich Insurance Company
Ltd. (IFS rating Aa3 stable). The rating outlook for Farmers
was changed to negative from stable reflecting high operational and financial
leverage.
RATINGS RATIONALE
According to Moody's, the rating affirmation reflects the
group's strong franchise as the seventh largest US personal lines insurance
group; its cost effective, largely captive agency distribution
system; its high quality investment portfolio; and support provided
by Zurich. Offsetting these positives are the group's meaningful
exposure to natural catastrophes (mitigated by outward reinsurance),
loss accumulations from smaller, more frequent events (e.g.
localized storms, wildfires), and aggressive operating and
financial leverage.
FGI extracts considerable management fees from Farmers, making this
operation valuable to Zurich but somewhat limiting Farmers' ability
to generate capital. The negative outlook reflects Farmers persistently
high gross underwriting and financial leverage relative to peers.
While Farmers has made good progress toward improving its personal auto
underwriting results by raising rates and implementing underwriting actions,
surplus has remained relatively flat and earnings modest. For the
first half of 2018, Farmers reported statutory net income of $130
million compared to a net loss of $148 million in the prior year
period.
Moody's expects that Farmers will continue to receive implicit and
explicit support from Zurich, including surplus notes and reinsurance.
Farmers' ratings benefit from its relationship with FGI and Zurich,
resulting in a single notch of uplift from Farmers' standalone credit
profile.
The surplus notes are subordinate to all policy claims and senior indebtedness
of the Exchanges. Interest and principal repayment on these surplus
notes are subject to prior approval of the Insurance Commissioner of the
State of California.
Factors that could return the outlook to stable include: stronger,
less volatile earnings (returns on policy holders' surplus above
4%); improved risk-adjusted capitalization; lower
adjusted financial and operating leverage (below 40% and 7x,
respectively); rating upgrades of major Zurich affiliates.
Factors that could lead to a downgrade include: failure to maintain
mid-single digit returns on policyholder surplus; continued
high financial and operating leverage (remaining above 40% and
7x, respectively); decline in policyholders' surplus of greater
than 10% over a year due to outsized losses (e.g.,
catastrophes, reserve development); rating downgrades of major
Zurich affiliates.
Moody's affirmed the following ratings:
Farmers Insurance Exchange -- insurance financial strength
at A2, surplus notes at Baa2 (hyb);
Farmers Insurance Company of Oregon -- insurance financial
strength at A2;
Truck Insurance Exchange -- insurance financial strength
at A2;
Fire Insurance Exchange -- insurance financial strength
at A2;
Mid-Century Insurance Company -- insurance financial strength
at A2;
Farmers Exchange Capital -- surplus notes at Baa2 (hyb);
Farmers Exchange Capital II -- surplus notes at Baa2 (hyb);
Farmers Exchange Capital III -- surplus notes at Baa2 (hyb).
The outlook for the ratings was changed to negative from stable.
Farmers Insurance Group, located in Los Angeles, California
provides personal lines and small commercial insurance in the United States.
For 2017, Farmers reported net premiums written of $14.3
billion and net income of $122 million. As of December 31,
2017, policyholders' surplus was $5.6 billion.
The principal methodology used in these ratings was Property and Casualty
Insurers published in May 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Michael Dion, CFA
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
