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Rating Action:

Moody's changes outlook on Farmers Insurance to positive

09 Aug 2007
Moody's changes outlook on Farmers Insurance to positive

New York, August 09, 2007 -- Moody's Investors Service today affirmed its A3 insurance financial strength ratings of members of the intercompany pool of Farmers Insurance Group (Farmers or the Exchanges) and the Baa3 debt rating on the surplus notes issued by Farmers Insurance Exchange. In the same action, Moody's upgraded the insurance financial strength (IFS) ratings on the insurance subsidiaries of Bristol West (BRW) to A3 from Baa1 following the completion of acquisition by Farmers. The rating upgrade concludes a review for possible upgrade that was initiated on February 22, 2007. Moody's also changed the ratings' outlook for the group to positive from stable reflecting Farmer's improved financial position.

The Farmers Insurance Exchange is a lead exchange in a group of reciprocal insurance exchanges including Farmers Insurance Exchange, Truck Insurance Exchange, and Fire Insurance Exchange (collectively "the Exchanges"). Under the subscription agreement signed by each policyholder, the reciprocal exchanges receive management services from Farmers Group, Inc.(FGI), against a fee that is based primarily on the business volume of the exchanges.

According to Moody's, the affirmation of Farmers' ratings reflect the group's strong franchise as the third largest personal lines writer in the US and its cost effective, largely, captive agency distribution system. The Exchanges also continue to benefit from the management relationship and strong economic linkage with the attorney-in-fact FGI, which in turn is owned by Zurich Financial Services Group (ZFS). Farmers' Group Inc. and other subsidiaries of ZFS provide both capital support primarily in the form of surplus notes to the Exchanges, as well as reinsurance coverage. Offsetting these positives are the Exchanges' relatively high operating leverage and financial leverage and meaningful exposure to gross catastrophe losses. While the company has made significant additions to reserves on business written in prior years, reserve strength remains a concern, given continued, albeit moderating, adverse development.

The upgrade to the IFS ratings of subsidiaries of Bristol West reflects the completion of the acquisition and planned integration, both operationally and financially, into the Farmers Group.

The positive outlook on the ratings reflects Farmers' improved profitability since 2003 as well as meaningful organic growth in surplus which has reduced operating and financial leverage metrics from historical peaks. The company has also re-underwritten its book of business and is focused on enhancing its technological capabilities, particularly pricing. Current capital spending as well as the acquisition of Bristol West should help further advance Farmers' goals around automated underwriting tools.

Moody's notes that strong earnings (returns on PHS above 5%), sustained improvements in risk adjusted capitalization, and adjusted financial and operational leverage (below 40% and 5x, respectively) could lead to a ratings' upgrade. Conversely, failure to maintain recent improvements in earnings and surplus, weakening in the capital base leading to higher operational or financial leverage (total financial leverage in excess of 50% or operating leverage above 8x) as well as meaningful adverse development (in excess of 5% of carried reserves) or unexpected, negative developments at ZFS could return the ratings to stable.

The last rating action on Farmers occurred on March 6, 2007, when Moody's affirmed the current ratings following Farmers' announcement that it had entered into an agreement to acquire Bristol West Insurance Holdings, Inc.(BRW) for approximately $712 million.

The following ratings have been affirmed with a positive outlook:

Farmers Insurance Exchange -- insurance financial strength at A3, surplus notes at Baa3;

Farmers Insurance Exchange of Oregon-- insurance financial strength at A3;

Truck Insurance Exchange -- insurance financial strength at A3;

Fire Insurance Exchange -- insurance financial strength at A3;

Farmers Exchange Capital -- surplus notes at Baa3.

The following insurance financial strength ratings have been upgraded and assigned a positive outlook:

Bristol West Casualty Insurance Company -- insurance financial strength to A3 from Baa1;

Bristol West Insurance Company -- insurance financial strength to A3 from Baa1;

Coast National Insurance Company -- insurance financial strength to A3 from Baa1;

Security National Insurance Company. -- insurance financial strength to A3 from Baa1.

Farmers Insurance Group, located in Los Angeles, California, had $5.3 billion in statutory surplus at December 31, 2006. The Exchanges, collectively, are leading writers of personal insurance products in the United States and in 2006, generated $15 billion in gross premiums written and net income of $720 million.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Jeffrey S. Berg
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

No Related Data.
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