Moody’s Investors Service has downgraded the insurance financial strength (IFS) rating of Farmers Insurance Exchange, the lead member of Farmers Insurance Group (Farmers) to A3 from A2 and the surplus note rating to Baa3 (hyb) from Baa2 (hyb). The rating outlook for Farmers is stable.
According to Moody’s, the downgrade of Farmers’ ratings reflects the group’s weak underwriting results, with meaningful exposure to natural catastrophes, as well as the company’s high operating and financial leverage.
The rating agency also downgraded the IFS ratings of other members of Farmers’ inter-company pool to A3 from A2, including Fire Insurance Exchange, Truck Insurance Exchange, and Mid-Century Insurance Company, among other affiliated insurers.
Moody’s writes, “While Farmers has made some progress toward improving its underwriting results by raising premium rates and implementing underwriting actions, its surplus has remained relatively flat and earnings modest.
“High loss cost inflation, as well as higher reinsurance costs, will make it challenging for Farmers to reduce its operating and financial leverage.”
Farmers holds a strong market presence as the seventh-largest personal lines writer in the US, says Moody’s, and its ratings reflect its cost-effective, largely captive agency distribution system, as well as its high-quality investment portfolio and support provided by Zurich.
Farmers 2021 acquisition of MetLife’s P&C business, rebranded Farmers Workplace Solutions (FWS), increased the company’s geographic diversification and distribution capabilities, says Moody’s, adding that the full benefits of owning FWS will emerge overtime.
Despite this, the firm suggests, “These positives are offset by the group’s weak profitability, meaningful exposure to natural catastrophes although this is mitigated by outward reinsurance, loss accumulations from smaller, more frequent events (e.g., storms, wildfires), and aggressive operating and financial leverage.”
Moody’s outlined some factors that could lead to a rating upgrade, which include a solid operating performance with combined ratios below 100%; adjusted financial and operating leverage declining below 38% and 6x, respectively; improved risk-adjusted capitalisation; or rating upgrades of other major Zurich affiliates.