A.M. Best Downgrades Ratings of State Auto Insurance Companies

A.M. Best Co. has downgraded the financial strength rating (FSR) to A (Excellent) from A+ (Superior) and issuer credit ratings (ICR) to “a+” from “aa-” of Columbus, Ohio-based State Auto Insurance Companies (State Auto) and its operating members.

Concurrently, A.M. Best has downgraded the ICR to “bbb+” from “a-” and debt rating to “bbb+” from “a-” on $100 million 6.25 percent senior unsecured notes, due 2013 issued by the group’s intermediate holding company, State Auto Financial Corporation (STFC).

The outlook for all ratings has been revised to stable from negative.

The downgrades are based on State Auto’s deterioration in underwriting and operating earnings in recent years, driven by an increased frequency and severity of property catastrophe losses.

State Auto’s negative rating factors include its exposure to localized tornado/hail storms and hurricane activity. These exposures historically have been mitigated through comprehensive reinsurance programs and available credit facilities, as well as underwriting initiatives aimed at reducing catastrophe exposures.

However, the increased frequency and severity of storm losses in recent years has dampened State Auto’s underwriting profitability and overall earnings. In addition, the group’s underwriting results remain pressured by its above average underwriting expense ratio, primarily related to agents’ commissions.

Commenting on Best’s actions, State Auto Insurance Companies President, Chairman and CEO Bob Restrepo’s said:

“Over the past five years, we’ve recognized our vulnerability to the weather and aggressively restructured our operations, diversified our business into new states and new markets, and made substantial investments in new products, services and systems. These initiatives were necessary to reduce weather-related earnings volatility and remain a stable, reliable market. In the end, they weren’t enough to offset the dramatic turn in the weather and our longstanding concentration in states exposed to property losses from wind, hail and tornadoes.”

Best noted that the ratings reflect State Auto’s strong risk-adjusted capitalization, long-standing regional market presence, well-established agency relationships, strong brand name recognition and diversified product offerings. The ratings agency also cited as assets State Auto’s software technology, its solid investment income, expanded pricing models, and improved risk management, all of which have contributed to moderate operating earnings over the previous five-year period. The ratings further reflect the financial flexibility and access to capital through STFC.

“While A.M. Best also cited above average expense ratios, this conclusion is based on industry results, not those for our regional company peer group where we’re quite competitive,” Restrepo said in an announcement released by the company. “The real issue is the weather and our inability to absorb its impact and produce consistent underwriting profits.”

Best recognized strategic initiatives implemented by the company aimed at improving underwriting results. These initiatives include rate increases in numerous states and lines of business, a reduction of property exposures in catastrophe-exposed areas, the implementation of increased wind and hail deductibles, an enhanced insurance-to-value program, the increased use of property catastrophe reinsurance and agency management actions.

The rating actions apply State Auto Group members: State Auto Property and Casualty Insurance Co.; State Automobile Mutual Insurance Co.; Milbank Insurance Co.; Farmers Casualty Insurance Co.; State Auto Insurance Co. of Ohio; Meridian Citizens Mutual Insurance Co.; Patrons Mutual Insurance Co. of Connecticut; Litchfield Mutual Fire Insurance Co.; Beacon National Insurance Co.; Meridian Security Insurance Co.; State Auto Florida Insurance Co.; State Auto Insurance Co. of Wisconsin; Beacon Lloyds Insurance Co.; Rockhill Insurance Co.; Plaza Insurance Co.; American Compensation Insurance Co.; and Bloomington Compensation Insurance Co.

The “decision by A.M. Best will not change our strategy and plans for the future,” Restrepo said. “We will continue to implement initiatives to strengthen our underwriting profitability and financial strength and preserve our terrific reputation.”

Source: A.M. Best, State Auto

Topics Catastrophe Carriers Auto Underwriting Property AM Best