OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has downgraded the financial strength rating (FSR) to A+ (Superior) from A++ (Superior) and issuer credit ratings (ICR) to “aa” from “aa+” of Tennessee Farmers Mutual Insurance Company (Tennessee Farmers) and its affiliate, Tennessee Farmers Assurance Company. The outlook for the ICRs is negative, while the outlook for the FSR has been revised to stable from negative. Additionally, A.M. Best has affirmed the FSR of A+ (Superior) and ICR of “aa-” of Tennessee Farmers Life Insurance Company (TFLIC). The outlook for these ratings is stable. All companies are domiciled in Columbia, TN.
The rating actions reflect Tennessee Farmers’ trend of poor underwriting results and ongoing exposure to weather-related events. Tennessee Farmers has a geographic concentration of risk, which exposes it to local and state-wide storms, as well as risks from changes in the economic, judicial and regulatory environment. The group’s exposure to weather-related events was evident in 2011, with several significant catastrophes caused by wind, hail and tornadoes. These catastrophes resulted in the largest catastrophic event and underwriting loss in Tennessee Farmers’ history and produced a surplus decline of approximately 15.5%, which elevated leverage measures. Prior to 2011, Tennessee Farmers’ performance metrics had been better than the personal lines composite average.
Despite the rating downgrades, Tennessee Farmers continues to maintain superior capitalization. The ratings further reflect management’s local market expertise and strong personal lines market position in Tennessee. These positive rating attributes are derived from management’s adherence to sound operating fundamentals, as demonstrated by its modest underwriting leverage, consistently favorable loss reserve development and a conservative investment philosophy. Tennessee Farmers also benefits from its favorable expense position, which gives it a sustainable competitive advantage. The company’s ongoing risk management initiatives also are reflected in its ratings, as well as the benefits it derives from the sponsorship provided by the Tennessee Farm Bureau Federation, which facilitates marketing and government relations efforts and enhances customer loyalty and affinity.
The negative outlook on the ICR recognizes Tennessee Farmers’ reduced surplus and considers potential reserve development from the April 25-28, 2011 tornado outbreak, which was the largest single-system tornado outbreak ever recorded. Even though additional catastrophes in the first quarter of 2012 further eroded surplus, underwriting performance improved during the second quarter. In addition, due to implemented rate changes and historically milder weather during the second half of the year, underwriting performance is expected to further improve.
The affirmation of the ratings for TFLIC is based on its strong risk-adjusted capitalization, positive but fluctuating net operating gains and recent positive trends in life premium growth. The ratings also recognize TFLIC’s strategic role within the Tennessee Farmers’ organization, where it shares common management. The challenges faced by TFLIC include its exposure to interest-sensitive products, spread compression in the current low interest rate environment and its single state geographic concentration.
Factors that could result in future negative rating actions include a continued deterioration in Tennessee Farmers’ underwriting performance or additional erosion of its capital base. A key rating trigger that could result in the removal of the negative outlook on the ICR is an improvement in the organization’s underwriting performance over the mid term while maintaining superior risk-adjusted capitalization.
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” and “Understanding BCAR for Property/Casualty Insurers.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.
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