Fitch Ratings Affs Federated Rural's 'BBB+' IFS Rtg; Outlook Pos.

Business Editors

Fitch Ratings has affirmed the 'BBB+' insurer financial strength rating of Federated Rural Electric Insurance Exchange (Federated Rural). The Rating Outlook remains Positive.

Federated Rural's rating is based on its solid capital position, conservative operating leverage, and its excellent niche in its target market. Additionally, while Federated Rural has experienced a modest increase in its investment allocation to equities and a decline in reinsurance protection over the past several years, their overall investment allocation and reinsurance programs remain quite conservative and well within Fitch's tolerances for the rating level.

At year-end 2001 Federated Rural recorded a very strong NAIC Risk-Based Capital Ratio of 300% of the company action level, up from 292% from the previous year. Operating leverage, as measured by net premium written to policyholders' surplus, while still very conservative, experienced a slight increase in 2001 to 1.04 times (x) from 0.87x in 2000. Federated Rural's market share continues to be impressive as it provides specialty coverage for 672 electric co-operatives in 39 states at year-end 2001. This accounts for a roughly 77% market share in states where they do business and 74% overall.

The rating also continues to reflect Federated Rural's narrow product and market focus, historically volatile operating results and a long-tail book of business, which adds variability to reserve levels. Also considered is Federated Rural's ownership by the electric and telephone cooperatives that it insures, which could depress long-term surplus growth through the demand for cash payouts of members' accounts or reduced premium rates.

Operating performance in 2001 declined when compared to recent years as evidenced by a combined ratio of 104.2% versus 100.3% in 2000. This decline is due to the combination of increased severity and frequency of electrical contacts, cost increases in the medical arena, increases in contributions to the guaranty fund, and a lower yield on Federated Rural's investment portfolio. Given the reciprocal exchange organizational structure, management targets and prices for a 100% combined ratio. Barring any extraordinary claims, Fitch expects Federated Rural to return to the near 100% combined ratio target in 2002.

The Positive Rating Outlook reflects Federated Rural's strong operating performance over the past six years, though performance in 2001 was modest, and the reduction in its financial leverage. Federated Rural reported a five-year average combined ratio of 99.9%, which represents a significant improvements from the 130% combined ratio experienced in 1993. As a result of strong earnings and debt retirements in recent years, Federated Rural's debt as a percent of statutory surplus has fallen to slightly under 24%, a significant improvement from 57% at year-end 1996.

Federated Rural is a specialty property/casualty insurer headquartered in Lenexa, Kan. Federated Rural was originally organized in 1959 as a stock company by rural electric and telephone cooperatives across the country to become a source of specialty insurance coverage. Its predecessor company was converted to a reciprocal exchange in 1999. As a reciprocal exchange, Federated Rural is the result of the mutual exchange of insurance contracts among members in an unincorporated association through an attorney-in-fact.

Entity/Issue/Type/Action/Rating/Outlook

Federated Rural Electric Insurance Exchange

-- Insurer financial strength Affirm 'BBB+'/Positive.