Moody’s has placed Farmers Insurance Group’s ratings on review for downgrade, a move that reflects the rating agency’s concerns around insurer’s underwriting results in its core personal lines and its capital adequacy.
The review includes Farmer’s A3 insurance financial strength (IFS) rating and Baa3 (hyb) surplus notes ratings.
As well as the A3 IFS ratings of other members of Farmers’ intercompany pool including Farmers Insurance Company of Oregon, Fire Insurance Exchange, Truck Insurance Exchange and Mid-Century Insurance Company.
According to Moody’s, “the review for downgrade will focus on Farmers’ prospective profitability and capital adequacy as well as ongoing efforts to reduce catastrophe exposure.”
The agency explained: “Farmers operates with higher gross and net operating leverage than other leading personal lines insurers, leaving the group more vulnerable to industry-wide challenges such as high auto insurance claims severity and high-frequency, low-severity weather-related events.
“While Farmers has taken steps to raise insurance rates, tighten underwriting standards and reduce peak catastrophe exposures, the group has experienced underwriting losses and a decline in capital since year-end 2022. For the first six months of 2023, Farmers reported a combined ratio of 113.9%, up from 105.9% in the first half of 2022, reflecting an accumulation of catastrophe losses from severe convective storms and atmospheric rivers.”
Farmers’ ratings reflect its strong market presence as the seventh-largest personal lines writer in the US; its cost effective, largely captive agency distribution system; its high-quality investment portfolio; and support provided by Zurich.
Farmers Group, Inc. (FGI), an unaffiliated management company owned by Swiss-based Zurich Insurance Group, whose lead operating company is Zurich Insurance Company Ltd., provides non-claims administrative and management services to the exchanges
Additionally, Farmers has increased its geographic diversification and distribution capabilities. The company has also remained focused on expense management and streamlining processes and systems. Farmers maintains a high-quality reinsurance panel and maintains occurrence-based and aggregate catastrophe reinsurance coverage.
However, “these strengths are tempered by the group’s weak auto and home insurance underwriting results, meaningful exposure to natural catastrophes, loss accumulations from smaller, more frequent events (e.g., storms, wildfires), and aggressive operating and financial leverage,” Moody’s stated.
Adding: “Farmers also writes 27% of its net premiums in California which is a challenging regulatory environment for personal lines insurers and prone to catastrophes such as wildfires.”
Moody’s said the following factors could lead to a confirmation of Farmers’ ratings: (i) improved risk-adjusted capitalization; (ii) significant reduction in catastrophe exposure; (iii) solid operating performance with combined ratios below 105%; (iv) adjusted financial leverage consistently below 40% and earnings coverage above 2x.
Factors that could lead to a downgrade of Farmers’ ratings include: (i) decline in policyholders’ surplus by more than 10% over a 12-month period; (ii) sustained combined ratios above 105%; (iii) adjusted financial leverage above 40% and earnings coverage below 2x.
