Farmers Benefits From AIG Deal, But Personal Auto Market Remains Unchanged

The sale of American International Group's auto unit to Zurich's Farmers Group subsidiary will not alter the personal auto landscape, but will allow Farmers to develop an East Coast presence and become a competitor in the direct writer market, experts and analysts said.

In exchange for the Wilmington, Del.-based 21st Century auto unit, which includes the former AIG Direct and Agency Auto business, AIG said Farmers Group will pay $1.9 billion, consisting of $1.5 billion in cash and $400 million in face amount of subordinated, euro-denominated capital notes backed by Zurich Insurance Company, Zurich's principal operating unit.

The transaction did not include the AIG Private Client Group, which provides property-casualty insurance to high-net-worth individuals, the company said.

Analysts from Fitch Ratings and Moody's Investor Services, as well as Steven Weisbart, senior vice president and chief economist of the Insurance Information Institute, all said the transaction will not be a landscape changer for the personal auto insurance market. This market, they agreed, is large and competitive, with many players of substantial size.

Mr. Weisbart said the significance of the transaction is that it anchors the business 21st Century has. Some units of AIG, he noted, are facing an uncertain future, and the sale of 21st Century to Farmers helps stabilize the business in that unit, he said.

He also said the acquisition represents a strong entry into the direct channel for Farmers.

Pano Karambelas, vice president and senior credit officer with Moody's, said Farmers did not previously have a direct channel distribution platform, and building one out would have been expensive. The acquisition of 21st Century, he added, gives Farmers an existing sizable distribution platform.

Mr. Karambelas said he expects Farmers will maintain both the direct channel and its agency channel. There is not a lot of overlap between the two–some synergy, but a lot is complementing build-out, he said.

Speaking to the impact Farmers' entrance into the direct channel could have on other direct writers, such as Progressive and GEICO, Paul Bauer, vice president, senior credit officer for Moody's, said the level of competition will remain largely the same. Progressive and GEICO, he noted, are well-run companies, and this transaction is not threatening to their franchises.

Jim Auden, an analyst with Fitch Ratings, said the acquisition helps Farmers expand geographically, as it writes most of its business on the West Coast, and much of the acquired business is in the eastern United States.

Mr. Karambelas said Moody's has affirmed Farmers' ratings at “A2.” He said that action was based on the fact that Farmers' is building out on the East Coast, and the complementary business platform represented by the acquisition. He also noted Farmers paid less than statutory book value for the auto unit.

These positives are somewhat offset by the increased gross operating leverage, as Farmers will need capital to cushion against the added premiums. But Mr. Karambelas said this is mitigated some by Zurich providing additional reinsurance coverage to Farmers.

The transaction “didn't move the needle enough” to upgrade the company's ratings, Mr. Karambelas said. He said even though the acquisition provides positives for Farmers, it is not a transformative transaction given the existing size of Farmers' personal lines platform.

Mr. Auden said the benefit to Farmers is it seized an opportunity to acquire a sizable property that was available. To gain that much organically would have been more difficult than making the purchase, he added.

Reacting to the deal announcement, Fitch revised its Rating Watch on the insurer financial strength ratings of American International Group auto subsidiaries involved to “negative” from “evolving.”

The AIG subsidiaries' current insurer financial strength ratings are “double-A-minus,” reflecting benefits from being part of the AIG organization and the benefits of recent government support, Fitch said, advising that when the deal closes, the rating expects that the auto insurance companies' financial strength ratings will likely be downgraded “to a level more commensurate with that of Zurich's,” which is “A-plus.”