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DUFF & PHELPS: FEDERATED RURAL ELECTRIC INSURANCE CORPORATION CLAIMS PAYING ABILITY REAFFIRMED AT 'A-'

 CHICAGO, Nov. 30 /PRNewswire/ -- Duff & Phelps Credit Rating Co. has reaffirmed the `A-' (Single-A-Minus) claims paying ability rating of the Federated Rural Electric Insurance Corporation (Federated). The rating reflects a conservative level of operating leverage, high quality investment portfolio, and prudent management of underwriting risk. Offsetting these positives are unstable profitability results, a historical pattern of adverse loss reserve development, and a significant reliance on outside sources of capital to maintain operating leverage ratios.
 Federated provides property and casualty insurance to rural electric cooperatives and rural telephone systems in 38 states. Federated is a stock company, with ownership of the company's common stock restricted to, but not required of, the cooperatives that are insured. The company's principal lines of insurance are general liability and workers' compensation. Federated's total net written premium for 1992 was $37.0 million.
 During 1988, Federated experienced a $22 million underwriting loss due primarily to settlement of claims associated with Washington Public Power Supply System (WPPSS) Projects 4 and 5 securities fraud litigation. To rebuild its surplus, Federated issued $21 million of preferred stock to the National Rural Utilities Cooperative Finance Corporation (CFC). CFC is a private, not-for-profit cooperative association, whose principal purpose is to provide loans and credit enhancements to its rural utility members.
 Federated has repurchased $6.4 million of the preferred stock from CFC over the 1989-1992 period, which, coupled with payments of preferred dividends and poor profitability, had resulted in increased operating leverage. Federated's premium to surplus ratio had increased to 2.53:1 at the end of 1991 from 2.14:1 at the end of the previous year. In order to return leverage to a prudent level, on December 21, 1992, Federated received an $11.1 million surplus note from CFC. A portion of the proceeds of the surplus note were used to offset strengthening of loss reserves, with the remainder utilized to increase policyholders' surplus. At year-end 1992, Federated's premium to surplus ratio was 1.70:1.
 Federated has also addressed profitability pressures by taking strategic actions in product pricing, controlling residual market exposure, and risk management. In 1990, the company formed a risk management division, which was further expanded in 1991. Working with rural cooperatives in states with high residual market assessments in the workers' compensation line of insurance, Federated helped these cooperatives form self-insured workers' compensation groups in 1991 and 1992. During the last quarter of 1992, Federated began a process of reviewing its product pricing strategies. In the latter part of 1993, the company has started to implement a pricing strategy based on the loss experience of the cooperatives it insures. While this strategy will have minimal affects in 1993, it should result in improved profitability in 1994 and beyond.
 -0- 11/30/93
 /CONTACT: Timothy A. Bienek, CFA of Duff & Phelps Credit Rating Co., 312-368-3192/


CO: Federated Rural Electric Insurance Corporation ST: IN: UTI SU: RTG

CK -- NY052 -- 8754 11/30/93 12:25 EST
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Publication:PR Newswire
Date:Nov 30, 1993
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