Moody's Investors Service has downgraded the insurance financial strength (IFS) rating of Farmers Insurance Exchange, a reciprocal insurance exchange and 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 agency also downgraded the IFS ratings of other members of Farmers' intercompany pool to A3 from A2 including Fire Insurance Exchange, Truck Insurance Exchange and Mid-Century Insurance Company, among other affiliated insurers. The rating outlook for Farmers however is stable. Farmers Group, an unaffiliated management company owned by Swiss-based Zurich Insurance Group (Zurich), whose lead operating company is Zurich Insurance Company Ltd. (IFS rating Aa3 stable), provides non-claims administrative and management services to the Exchanges. 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. 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 its 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' ratings reflect the group's 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. The 2021 acquisition of MetLife's P&C business, rebranded Farmers Workplace Solutions (FWS), has increased the company's geographic diversification and distribution capabilities, and the full benefits of owning FWS will emerge over time. 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. FGI receives considerable management fees from Farmers, making this operation valuable to Zurich but somewhat limiting Farmers' ability to generate capital. Moody's expects that Farmers will continue to receive implicit and explicit support from Zurich, such as strategic support, reinsurance assumed from Farmers, and/or investments in Farmers' surplus notes. Farmers' ratings benefit from its relationship with FGI and Zurich, resulting in a single notch of uplift from Farmers' standalone credit profile.
