A.M. Best Revises Outlook to Negative for The Farmers Fire Insurance Company

A.M. Best Co. has revised the outlook to negative from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of The Farmers Fire Insurance Company (Farmers Fire) (York, PA).

The revised outlook reflects Farmers Fire’s long-term trend of poor underwriting results and recent surplus deterioration. Over the last two years, earnings have been strained due to severe weather-related events, which include winter storms, hail storms and most recently, Hurricane Irene and Tropical Storm Lee. Additionally, Farmers Fire maintains an elevated expense position that continues to hinder profitability. As a single state writer in Pennsylvania, Farmers Fire’s operating results will continue to be exposed to concentrated weather-related events and competitive market conditions. As a result of the increased storm severity over the last two years, Farmers Fire’s surplus has declined approximately 20%. A.M. Best is concerned that the company’s surplus may deteriorate further if its operating performance does not improve in the near term.

Despite the negative outlook, Farmers Fire’s ratings reflect its favorable risk-adjusted capitalization, strong balance sheet liquidity and long-standing market presence in Pennsylvania. Furthermore, management has undertaken aggressive measures to improve Farmers Fire’s operating results, which include rate increases, re-underwriting initiatives, claims surcharges, new product offerings and changes in employee benefits; however, at this time uncertainty remains regarding the ultimate success of these initiatives.

Negative rating action will occur if there is a continued decline in Farmers Fire’s underwriting profitability and/or considerable deterioration in its capital strength as measured by A.M. Best’s capital model.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Natural Catastrophe Stress Test Methodology”; “Catastrophe Analysis in A.M. Best Ratings”; and “Catastrophe Risk Management Incorporated Within the Rating Analysis.” Methodologies can be found at http://www.ambest.com/ratings/methodology.