A.M. Best Co. has downgraded the financial strength rating (FSR)
to B++ (Good) from A- (Excellent) and the issuer credit ratings to
“bbb+” from “a-“ of United Farm Family Mutual Insurance Company (UFF
Mutual) and its wholly owned subsidiary, UFB Casualty Insurance
Company (UFB Casualty). The outlook for the FSR is stable, while the
outlook for the ICRs has been revised to negative from stable.
In addition, A.M. Best has affirmed the FSR of A (Excellent) and ICR of
“a” of United Farm Family Life Insurance Company (UFF Life) and
the FSR of A- (Excellent) and ICR of “a-“ of United Home Life
Insurance Company (UH Life). The outlook on the ratings of the life
companies is stable. All companies are domiciled in Indianapolis, IN.
The ratings of UFF Mutual are based on a consolidation of the company
with UFB Casualty, which it reinsures with 100% quota share reinsurance.
The downgrading of the ratings is due to a significant decrease in
risk-adjusted capitalization and unfavorable operating performance in
2012. In addition, UFF Mutual’s earnings over the last five years have
been below A.M. Best’s expectations. This is primarily the result of the
company’s concentration of risk in the State of Indiana and underwriting
losses due to a trend of more frequent and severe weather-related events
and realized and unrealized investment losses from the downturn in the
equity market in 2008. Furthermore, earnings for 2012 were adversely
impacted by six distinct storm events, with a late February/early March
storm being the worst in terms of loss in the company’s history.
These negative rating aspects are offset in part by adequate
risk-adjusted capitalization that supports the current ratings and by an
excellent business profile in the State of Indiana. The companies are
the leading provider of farmowners’ insurance and one of the top three
auto and homeowners’ insurers in the state based on direct premium
written. The ratings benefit from the companies’ association with
Indiana Farm Bureau, Inc. and actions being taken to improve earnings
and reduce risk. These include significant rate increases on home and
farm insurance, higher wind/hail deductibles, increased use of
predictive modeling, slowing growth and other profitability initiatives.
The ratings of UFF Mutual may be further downgraded if operating
performance does not improve and meet expectations or if there is a
further weakening in risk-adjusted capitalization. The outlook on the
ICR may be stabilized by an improving earnings trend that leads to
The ratings affirmation of UFF Life acknowledges the company’s strong
risk-adjusted capitalization, which is the result of positive operating
earnings and an investment portfolio with overall good credit quality.
UFF Life also possesses a stable liability profile as interest-sensitive
reserves as a percentage of total reserves are significantly lower than
the industry average.
UFF Life does have elevated holdings of commercial mortgages, which
represents an amount in excess of capital and surplus. Sound
underwriting practices, low loan to value ratios and diversification by
property type and geographic region partially mitigate this exposure.
UFF Life also faces exposure to geographic concentration risk, as most
of its business is transacted in the State of Indiana. UFF Life also
faces the challenges of maintaining spreads on its interest-sensitive
products as the low interest rate environment persists.
UH Life possesses a strong risk-adjusted capitalization, an investment
portfolio with good credit quality and increased access to more
geographic markets. Partially offsetting factors include the company’s
modest contribution to enterprise results, variability in net income and
modest premium production.
UFF Life and UH Life are well positioned for their ratings. Factors that
could lead to downward ratings pressure include erosion of capital from
operating and investment losses, increased exposure to interest rate
risk and capital requirements from other entities within the Indiana
Farm Bureau enterprise.
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. Key criteria
utilized include: “Risk Management and the Rating Process for Insurance
Companies”; “Understanding BCAR for Property/Casualty Insurers”;
“Understanding BCAR for Life/Health Insurers”; “Catastrophe Analysis in
A.M. Best Ratings”; and “Rating Members of Insurance Groups.” Best’s
Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is the world's oldest and most
authoritative insurance rating and information source. For more
information, visit www.ambest.com.