A.M. Best has upgraded the issuer credit rating (ICR) to “a+” from “a” and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) of State Farm General Insurance Company, and has revised its outlook for the ICR to stable from positive; the outlook for the FSR is stable.
Best has also affirmed the FSRs of ‘A++’ (Superior) and the ICRs of “aa+” of State Farm General’s parent, State Farm Mutual Automobile Insurance Company (SFMAIC) and its affiliate, State Farm County Mutual Insurance Company of Texas, as well as the State Farm Life Group’s members, State Farm Life Insurance Company and State Farm Life and Accident Assurance Company. All companies are headquartered in Bloomington, Illinois, except where specified.
The outlook for all of these ratings is stable.
Best explained that the upgrading of the ICR of State Farm General is “based on its strong risk-adjusted capitalization, continued favorable earnings trend, excellent business profile and its strategic importance to SFMAIC. The ratings also benefit from the explicit support State Farm General receives from SFMAIC.”
As a partial offsetting factor Best noted “State Farm General’s concentration of risk in the California homeowners’ insurance market, which exposes it to losses from extreme weather-related events and fires following earthquakes, changes in the regulatory and economic environment in California, as well as localized competitive market pressures.
“State Farm General’s capitalization has continued to improve due to strong operating results driven by profitable underwriting, which supplements significant net investment income. This favorable underwriting experience is reflective of the company’s tighter underwriting guidelines and a lack of significant catastrophe activity in recent years.
“State Farm General’s business profile is excellent due to its affiliation with SFMAIC, which provides strength of brand, market penetration, customer loyalty and an efficient marketing and distribution system. The ratings also recognize SFMAIC’s demonstrated financial commitment, as it provides significant catastrophe reinsurance protection to State Farm General.”
Best said its ratings for SFMAIC are “reflective of its strong risk-adjusted capitalization, generally positive operating earnings and superior business profile. Risk-adjusted capitalization continues to be supportive of the company’s ratings, and earnings have been positive despite the prolonged low interest rate environment and increased frequency of severe storm and wildfire activity across the United States.
“In addition, SFMAIC, its subsidiary and affiliated property/casualty and life insurance companies comprise the largest personal lines insurance organization in the United States based on direct premiums written and the second-largest in terms of policyholders’ surplus. The State Farm group is the leading provider of homeowners’ and private passenger automobile insurance in the United States. The organization’s personal lines products are complemented by other lines of business such as commercial multi-peril, commercial auto liability, workers’ compensation and several other lines.
“Banking and other financial services are offered through affiliates to further enhance the sale of personal lines products. The State Farm group’s main distribution channel is its exclusive independent agency force, which along with mass advertising, has contributed to high customer retention rates and below average expense ratios. The ratings for the subsidiaries and affiliate of SFMAIC also benefit from shared services, common management, cross selling of products and services, common distribution, brand name recognition and a comprehensive enterprise risk management program.”
As somewhat offsetting the positive rating aspects Best cited the “State Farm Group’s below average earnings, above average exposure to equity market volatility and continued low interest rates.”
The report noted that “profitability has been adversely impacted by significant underwriting losses arising from catastrophic hurricanes, tornadoes/hail, severe winter weather and losses arising from wildfires caused by hot and dry weather conditions. However, these concerns are partially mitigated by actions being taken by management to consolidate underwriting and claims handling, reduce property exposure in high risk areas, increase rates where appropriate, upgrade and modernize systems and expand production through alternative distribution channels.”
Best said its outlook for the ratings of SFMAIC, its property/casualty subsidiaries and affiliate, “may be subject to negative rating pressures if the company’s operating performance and capitalization levels were to significantly deteriorate. However, continuing favorable operating trends that lead to sustained capital appreciation without excessive growth would further stabilize the organization’s ratings.
“Additionally, the affirmations of the ratings for State Farm Life recognize that it is an integral member of the State Farm group. State Farm Life markets a wide array of protection and asset accumulation products while benefitting from the competitive advantages derived from State Farm group’s exclusive multi-line career agency system. The ratings also recognize State Farm Life’s superior stand-alone risk-adjusted capitalization and solid earnings performance primarily generated from its ordinary life segment.”
Best said it “considers State Farm Life’s level of risk-adjusted capitalization to be superior as its regulatory capital ratio is among the strongest in the industry. State Farm Life’s capital base is further supported by a conservative liability portfolio that is absent of living benefits or longer-term secondary guarantees. Furthermore, State Farm Life finances its statutorily required excess reserves related to term life insurance (Regulation XXX) with internal capital rather than externally through either domestic captives or offshore reinsurers.”
As partial offsetting factors Best cited the “challenges State Farm Life faces to manage its interest-sensitive liabilities through the continued low interest rate environment. State Farm Life faces spread compression and reinvestment challenges in its fixed annuity and interest sensitive life portfolios. While earnings remain strong, 2013 statutory operating results were pressured by higher mortality for both traditional and variable products. State Farm Life’s focus is on increasing the distribution and the penetration of its products by expanding its customer base and continuing to explore cross-selling opportunities.”
The report also noted that on January 24, 2014, A.M. Best placed under review with negative implications the FSR of ‘A+’ (Superior) and the ICR of “aa” of Bermuda-based State Farm International Life Insurance Company Ltd. (SFI).
Best said it took these rating actions following “the recent announcement by Montreal-based Desjardins Group to acquire all of SFMAIC’s Canadian property/casualty, life insurance and Canadian mutual fund businesses. The ratings will remain under review until the completion of the transaction, which is expected to occur in January 2015.”
Best said that upon completion of the transaction, it “expects the ratings of SFI to be withdrawn, as the policyholder obligations as well as the majority of its assets are expected to transfer to the Desjardins Group.”
The report also indicated that Best “believes State Farm Life is well-positioned at its current rating level for the foreseeable future. However, downward rating actions may occur should SFMAIC experience any negative rating actions.
In addition the report noted that the “FSR of ‘A+’ (Superior) and ICR of “aa-” have been affirmed for State Farm Fire and Casualty Company. The FSR of ‘A-‘ (Excellent) and ICR of “a-” have been affirmed for State Farm Indemnity Company, and the FSR of ‘B++’ (Good) and ICR of “bbb” have been affirmed for State Farm Lloyds.”
Source: A.M. Best