A.M. Best placed under review with negative implications the financial strength rating of A (Excellent) and the issuer credit rating of “a” of Farmers Mutual Hail Insurance Company of Iowa (FMH) of West Des Moines, Iowa.
The under review status is based on the recent announcement that FMH has entered into a definitive agreement to purchase John Deere Insurance Co., also located in Des Moines.
This transaction would provide greater scale and diversity to FMH’s current book of business, which is expected to reduce underwriting volatility. The combined companies would also have an expanded agency force, significantly greater gross premium volume with FMH’s adding 24 states to its current geographic footprint of 15, a reduced concentration in Iowa and greater diversification in both products (multi-peril crop insurance versus crop hail) and non-Midwestern states.
Additional favorable factors include an improved technology base, expense and reinsurance cost savings and improved market share within the farming community insurance market.
However, there is execution risk regarding management’s ability to reduce the recent underwriting volatility at both companies.
FMH management has revised their 2015 underwriting criteria with the objective of producing more consistent outcomes. This plan would help mitigate the impact of weather, growing conditions, and commodity price changes that have led to the spikes in gains and losses in recent years. It is expected that the combined companies’ expense ratio will increase in 2015 before decreasing in the following years due to transaction and integration costs.
As a result, FMH’s operating margins will remain under pressure in the near term.
The negative implications reflect A.M. Best’s view that the ratings or outlooks could be lowered if planned changes in underwriting, expense reductions and reinsurance costs are deemed to be insufficient to return the group to a profitable footing in 2016 and beyond. This is a concern given the lack of profitability at both FMH and John Deere in recent years. The negative implications also reflect the execution risk associated with FMH’s plans to bolster the group’s overall level of capitalization.
The companies will remain under review until the transaction closes, likely during the first quarter of 2015, and A.M. Best meets with management to complete its analysis. Factors that could result in negative rating actions are the ability of FMH to successfully execute on its plan to return the companies to a profitable footing by 2016 and provide for additional capital support in 2015.
As indicated above, A.M. Best has concerns with regard to the weak operating outcomes that have led to the reduction in risk-adjusted capital at FMH in recent years. Although capitalization continues to strongly support current operations, the impact of weak operating trends could negatively impact the ratings. Factors that could lead to a ratings affirmation include the company’s ability to demonstrate to A.M. Best that its plan to return to profitability while simultaneously bolstering the capital position will lead to success in the near term.
Source: A.M. Best
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