[August 21, 2014]

A.M. Best Affirms Ratings of the Members of Farmers Insurance Group

A.M. Best has affirmed the financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of "a" of the members of Farmers Insurance Group (Farmers) and Farmers Reinsurance Company. Concurrently, A.M. Best has affirmed the ICR of "a" of Farmers' management company and attorney-in-fact, Farmers Group, Inc. (FGI) as well as the debt ratings on the outstanding surplus notes of Farmers Insurance Exchange (Exchange) and Farmers Exchange Capital. In addition, A.M. Best has assigned a debt rating of "bbb+" to the $335 million 6.151% surplus notes due November 2053 issued by Farmers Exchange Capital. The outlook for all ratings is stable. All companies are domiciled in Los Angeles, CA (News - Alert), unless otherwise specified.

Additionally, A.M. Best has withdrawn the ICR of "bbb" of Farmers' subsidiary, 21st Century Insurance Group (Wilmington, DE), following the maturity and repayment of the $100 million senior debt in late 2013. (Please see the link below for a detailed listing of the companies and ratings.)

The ratings reflect Farmers' market leadership position, prudent risk management efforts, adequate risk-adjusted capitalization and solid historical operating performance. In addition, strategic acquisitions have improved Farmers' product and geographic diversification, as well as created a multi-channel distribution system with captive agents, independent agents and direct-to-consumer sales.

Partially offsetting these strengths is Farmers' variable operating performance due in part to catastrophe exposure. However, Farmers continues to take considerable measures to enhance its underwriting performance through targeted pricing actions and risk-mitigation strtegies, strengthened underwriting controls and increased utilization of segmentation.

In addition, the ratings reflect the group's strategic importance to Zurich Insurance Group, Ltd. (Zurich) (Switzerland). Collectively, the members of Farmers are one of the largest personal lines insurers in the United States, with a particularly strong market position in the western and southwestern regions. Although Zurich has no ownership interest in the Exchanges, both entities are strategically linked via an attorney-in-fact relationship between the Exchanges and FGI, Zurich's wholly owned subsidiary. This linkage provides FGI with a source of consistent fee income, which is accessible to Zurich through FGI dividends. Given the structural relationship between Zurich and the Exchanges, A.M. Best deviated from its "Rating Members of Insurance Groups" criteria by providing Farmers with rating enhancement from Zurich. As prescribed by the criteria, to be eligible for rating enhancement, an individual company must operate under common ownership, with the entity providing lift or maintaining board control together with common management. In this case, while there is a management relationship between FGI and the Exchanges, the boards of FGI and the Exchanges are independent.

Future positive rating movement for the insurance operations is contingent upon the establishment and continuation of a positive trend in Farmers' underwriting results. Conversely, if underwriting results should deteriorate and cause a decline in the organization's risk-adjusted capitalization or the level of support that Farmers receives while being managed by FGI, which is a wholly owned subsidiary of Zurich, is significantly reduced, downward rating pressure on the outlook and/or ratings could be exerted.

For a complete listing of the members of Farmers Insurance Group's FSRs, ICRs and debt ratings, please visit www.ambest.com/press/082107farmers.pdf.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process. Best's Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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