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AIG's Personal Lines Subs and 21st Century Insurance Group Downgraded After Sale to Farmers Insurance Exchange

Source: Standard & Poors

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Posted on 09 Jul 2009

Standard & Poor's Ratings Services said today that it lowered its counterparty credit and financial strength ratings on the personal lines operating insurance units of 21st Century Insurance Group and American International Group Inc. (AIG) to 'A' from 'A+'. In addition, Standard & Poor's lowered its counterparty credit rating on intermediate holding company 21st Century Insurance Group to 'BBB' from 'A-'.

Standard & Poor's also lowered its senior unsecured debt rating on 21st Century Insurance Group's $100 million issue to 'BBB' from 'A-'.

Standard & Poor's also said that it removed its ratings on these companies from CreditWatch with negative implications.

In addition, Standard & Poor's assigned counterparty credit ratings to the former AIG subsidiaries that didn't already have them.

The outlook is stable.

We took these rating actions in response to the recent closing of the sale of 21st Century Insurance Group and AIG's wholly owned subsidiaries that are active in the U.S. personal auto insurance business to the Farmers Insurance Exchange (Farmers; A/Stable/--) group of insurance companies. "We consider these acquired entities to be core to Farmers, mostly because of their explicit support by Farmers by means of a 100% reinsurance treaty," explained Standard & Poor's credit analyst Tracy Dolin. The acquired companies collectively are the eighth-largest personal auto writer in the U.S., with a strong Top Three competitive positioning in direct distribution. Somewhat offsetting these strengths are a California-centric book of business and some reputational damage stemming from AIG's financial difficulties.

As part of the transaction, Farmers acquired 21st Century Insurance Group, an intermediate holding company, including the entity's $100 million of senior unsecured debt. As a non-insurance operating company, 21st Century Insurance Group will rely on the broader Farmers group for the servicing and repayment of its debt. In terms of priority of claims, we view 21st Century Insurance Group's $100 million senior unsecured notes to be subordinate in ranking with Farmers' surplus notes (BBB+); it services this debt with funds directly from its insurance operations. Therefore we are applying a one-notch differential between the Farmers surplus notes and 21st Century Insurance Group's $100 million senior unsecured debt.

Standard & Poor's believes 21st Century will enhance Farmers' competitive position in personal auto insurance market. We estimate that 21st Century will add less than $3 billion of annualized gross premiums to the Farmers Exchanges. We expect that 21st Century's gross premiums will contract by low double digits over the next year as the company overcomes reputational damage borne from AIG's financial difficulties. We expect that 21st Century will cede 100% of its premiums to Farmers. In turn, we expect Farmers to increase its all-lines quota-share reinsurance with Zurich Financial Services to 37.5% from 25% following the closing of the acquisition.


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