State Farm Indemnity Pulls Out of N.J. Auto Market, Gets A.M. Best Downgrade

June 14, 2001

State Farm Indemnity announced on June 12 that it intends to stop writing automobile business in New Jersey.

The announcement was immediately followed by A.M. Best Co. downgrading the financial strength rating of the Wayne, N.J.-based insurer, from “A-” to “B+.” In addition, the rating has been placed under review with developing implications.

A.M. Best cited the continued deterioration in the company’s overall operating performance and further erosion of its capital base. Since 1998, the company’s results have deteriorated significantly, as evidenced by substantial underwriting losses. These poor results have been driven by rate inadequacy as well as the company’s unfavorable loss experience. While its geographic business concentration in New Jersey presents a challenging regulatory environment, particularly given the enactment of the Automobile Insurance Cost Reduction Act of 1998 (AICRA), the company’s overall results are significantly worse than many of its larger peers, A.M. Best reported.

The rating bureau also stated that performance was particularly poor in 2000 as State Farm Indemnity recorded a nearly 32-percent drop in surplus, due mostly to unfavorable loss experience, with an overall combined ratio of 133. As a result of this decline, as well as an additional 6-percent drop in the first quarter of 2001, the company’s net written premiums to surplus is more than 3.1, with net leverage including liabilities at nearly 10-to-1.

Despite the weakened capital position, including lack of current capital support from the parent, the secure rating is based on A.M. Best’s expectation that the company will continue to have funds sufficient to pay its anticipated claims going forward. Further, the secure rating reflects the parent company’s long-standing commitment to policyholders derived from its mutual ownership structure.

According to the American Insurance Association, the announcement that State Farm Indemnity is leaving the New Jersey auto insurance market is the result of decades of government overregulation.

“This is the culmination of a longstanding failed policy of allowing government forces to dictate what happens in New Jersey’s auto insurance marketplace,” said David F. Snyder, assistant general counsel, AIA. “Since the early 1970s, New Jersey has made numerous attempts to ‘fix’ the state’s auto insurance market. Ironically, each successive ‘fix’ has added more bureaucracy, more red tape, and ultimately more costs for everyone…We still believe that New Jersey can have a very positive system that serves all consumers, but having a company the size of State Farm stop writing business is a very bitter pill to swallow. The fact is this will place additional challenges on a market that is already suffering considerably.

“The state’s consistent refusal to set auto insurance prices according to real-world costs and other regulatory controls continue to make it difficult to do business here…In order to get the best products at the best prices, New Jersey must allow free-market principles to govern the marketplace,” Snyder explained.

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