A.M. Best has affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and the issuer credit ratings (ICR) of “a” of State Automobile Mutual Insurance Company and its operating subsidiaries.
Best has also affirmed the ICR of “bbb” of State Auto’s intermediate holding company, State Auto Financial Corporation (STFC). However the “outlook for all ratings is negative,” Best said.
All the above companies are headquartered in Columbus, Ohio.
The ratings reflect State Auto’s “strong risk-adjusted capitalization, recently improved operating performance, long-standing regional market presence, well-established agency relationships, solid brand name recognition and diversified product offerings,” Best explained.
“State Auto also benefits from its software technology, which further enhances and cultivates agency relationships, while improving overall operating efficiencies. The ratings also reflect the financial flexibility and access to capital that State Auto has through STFC.”
Best said the negative outlook is “based on State Auto’s significant operating losses and its decline in policyholders’ surplus in 2011 and 2012, driven by property catastrophe losses and underwriting losses in the group’s specialty lines segment.
“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 over the previous five-year period has adversely impacted State Auto’s underwriting profitability, overall earnings and surplus position.
“In 2012, State Auto also experienced deterioration in its specialty lines segment, driven by increased losses on its large commercial trucking and commercial restaurant programs. These policies were placed into run off during 2012 with the run-off of premiums completed by year-end 2013.
“State Auto’s management believes loss reserves are adequate for the remainder of the run-off of its claims. In addition, the group’s underwriting results remain pressured by its above-average underwriting expense ratio, primarily related to agents’ commissions.”
Best’s report also indicated that State Auto has “recently implemented numerous strategic initiatives to improve underwriting results. These initiatives include rate increases in a number of states and lines of business, a reduction of property exposures in catastrophe-exposed areas, the implementation of increased property wind and hail deductibles, the implementation of an enhanced homeowner by-peril rating program, stepped up insurance-to-value efforts, the increased use of property catastrophe and quota share reinsurance and agency management actions.
“These strategic initiatives and reduced storm activity have resulted in improved operating earnings and solid surplus growth in 2013, although underwriting results were tempered by ceded premiums from its homeowners’ quota share reinsurance contract and the run-off of business in the specialty lines segment.”
In conclusion Best said: “Negative rating actions could occur if State Auto has a continuation of operating losses and/or surplus deterioration, which ensued over the previous five-year period, potentially driven by weather-related catastrophe losses or other causes. State Auto would have to sustain a trend of improved operating results and surplus growth for the outlook to be revised to stable.”
Best summarized the companies affected by its rating actions as follows:
The FSR of ‘A’ (Excellent) and the ICRs of “a” have been affirmed for State Automobile Mutual Insurance Company and its following operating subsidiaries:
State Auto Property and Casualty Insurance Company
Milbank Insurance Company
State Auto Insurance Company of Ohio
Meridian Citizens Mutual Insurance Company
Patrons Mutual Insurance Company of Connecticut
Meridian Security Insurance Company
State Auto Insurance Company of Wisconsin
Rockhill Insurance Company
Plaza Insurance Company
American Compensation Insurance Company
Bloomington Compensation Insurance Company
Source: A.M. Best