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Rating Action:

Moody's upgrades Zurich Group's Centre Re & Zurich Capital Markets; confirms Farmers Insurance

09 Mar 2011

New York, March 09, 2011 -- Moody's announced today that it has upgraded the insurance financial strength (IFS) rating of Centre Re Insurance (US) Ltd. to A1 from A2 and the issuer rating of Zurich Capital Markets to Aa3 from A1. In the same rating action, Moody's confirmed the A2 IFS ratings of the members of the Farmers Insurance Group ("Farmers" or "the Exchanges") and the Baa2 (hyb) ratings of Farmers' surplus notes. The rating actions follow Moody's announcement that it had upgraded the IFS rating (to Aa3 from A1) and debt ratings (senior to A1 from A2) of Zurich Insurance Company Ltd (Zurich). The outlook on the ratings is stable. Moody's said the rating actions conclude a review for possible upgrade that was initiated on October 18, 2010 to determine whether the ratings of the U.S.-based affiliates of Zurich should receive further uplift in the event of Zurich's ratings being upgraded.

RATINGS RATIONALE

As the third largest personal lines writer in the U.S., Farmers' represents a significant element of Zurich's North American long-term business strategy. However, the confirmation of Farmers' IFS ratings reflects Moody's view that the Exchanges -- which are not owned by the Zurich Group -- benefit from a narrower scope of support compared to subsidiaries of the Zurich Group. The rating agency believes that the Exchanges will continue to receive explicit support from the Zurich Group via internal surplus note investments and/or reinsurance protection, warranting a notch of rating uplift from Farmers' stand alone credit profile. However, unlike subsidiaries of the Zurich Group, the Exchanges -- which comprise a group of reciprocal exchanges -- are not be able to receive equity infusions from Zurich following stress events, including potentially large natural catastrophe losses, thereby limiting further ratings uplift (beyond the current one notch of uplift) of Farmers' ratings.

Farmers' stand-alone A3 credit profile reflects its strong franchise as the third largest personal lines writer in the U.S., the company's cost-effective, captive agency distribution system, the expected benefits of its newly-acquired direct channel capabilities (21st Century), as well as the group's good profitability (excluding catastrophes). Offsetting these strengths is the company's significant exposure to gross catastrophe losses (mitigated through external reinsurance), elevated financial leverage, and high operating leverage driven in part by the management fee, paid to Farmers Group, Inc (a subsidiary of Zurich), which represents a meaningful share of the Exchanges' ability to generate capital internally.

The upgrades of Zurich Insurance Company's other affiliates including Centre Re Insurance (US) Ltd. (CRUS), Zurich Capital Markets Inc., and ZCM Matched Funding Corp. reflect the recent upgrade of Zurich which provides an unconditional guarantee and/or surety wrap to these entities.

The capital securities issued by Zurich RegCaPS were also upgraded (to A3 from Baa1); these securities are indirectly supported by preferred stock dividends from Farmers Group Inc. (FGI). FGI, a wholly owned subsidiary of Zurich, is the attorney-in-fact for Farmers Insurance Group and is responsible for most aspects of managing Farmers. While Zurich RegCaPS are not explicitly guaranteed by Zurich Insurance Company or Zurich Financial Services, the preferred stock ratings also benefit from strong implicit support given the strategic importance of FGI and Farmers to Zurich. Absent the ownership and implied support, the rating of the RegCaPS would be lower.

The following ratings were confirmed with a stable outlook:

Farmers Insurance Exchange: A2 insurance financial strength rating, surplus notes at Baa2 (hyb);

Farmers Insurance Exchange of Oregon: A2 insurance financial strength rating;

Truck Insurance Exchange: A2 insurance financial strength rating;

Fire Insurance Exchange: A2 insurance financial strength rating;

Farmers Exchange Capital: surplus notes at Baa2 (hyb);

The following ratings were upgraded with a stable outlook:

Zurich RegCaPS Funding Trust II, V, & VI: preferred stock rating to A3 (hyb) from Baa1 (hyb).

Centre Reinsurance (US) Ltd: insurance financial strength rating to A1 from A2;

Zurich Capital Markets Inc: issuer rating to Aa3 from A1;

Espial Ventures Limited: senior secured debt rating to Aa3 from A1;

Capstone Investments Limited: senior secured debt rating to Aa3 from A1;

Argus Ventures Limited: senior secured debt rating to Aa3 from A1;

Vista Investments Limited: senior secured debt rating to Aa3 from A1;

The following rating was affirmed with a stable outlook:

ZCM Matched Funding Corp.: P-1 short-term issuer rating;

The principal methodologies used in this rating were Moody's Global Rating Methodology for Property & Casualty Insurers published May 2010.

Farmers Insurance Group, located in Los Angeles, California, had approximately $6.0 billion in statutory surplus at December 31, 2009. The Exchanges, collectively, are leading writers of personal insurance products in the United States and in 2009 generated $19.4 billion in gross premiums written and net income of $818 million.

Moody's last rating action on Farmers and Zurich's rated U.S. operations occurred on October 18, 2010 when the ratings were placed on review for possible upgrade.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Pano Karambelas
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Zurich Group's Centre Re & Zurich Capital Markets; confirms Farmers Insurance
No Related Data.
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