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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 capital appreciation.
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.