A.M. Best Revises Outlook to Positive for Federated Rural Electric Insurance Exchange

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of A- (Excellent) and issuer credit rating of “a-” of Federated Rural Electric Insurance Exchange (FREIE or the Exchange) (Lenexa, KS).

These rating actions reflect FREIE’s strong capitalization, favorable operating performance and firmly established market position as a specialty writer for rural electric cooperative utilities and rural telephone systems. These positive rating factors are derived from the Exchange’s prudent underwriting standards, firm pricing within its major books of business, strict loss control processes and strong relationships with its insureds.

Partially offsetting these positive rating factors are FREIE’s limited business scope and adverse loss reserve development on its core lines of business for certain prior accident years, which coincide with years where premium growth was higher than average. However, both the adverse loss reserve development as well as premium growth has moderated in more recent years. Although FREIE is susceptible to claims severity, this exposure is somewhat mitigated by an active management that is combined with a comprehensive reinsurance program. The Exchange continues to be supported by the National Rural Utilities Cooperative Finance Corporation (CFC). CFC holds the Exchange’s surplus note and has demonstrated its commitment through its willingness to be flexible with the terms of the note. In addition, the business concentration is partially offset by FREIE’s geographic spread of risk. A.M. Best believes that both earnings and surplus will continue to grow modestly but without the volatility typically seen in most insurers’ results.

Factors that could lead to rating upgrades include a continued strong operating performance and stable reserve development. The outlook could be revised if operating performance falls markedly short of A.M. Best’s expectations.

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: “Catastrophe Analysis in A.M. Best Ratings”; Equity Credit for Hybrid Securities”; “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; and “The Treatment of Terrorism Risk in the Rating Evaluation.” Best’s Credit Rating Methodology can be found at http://www.ambest.com/ratings/methodology.