A.M. Best Affirms Ratings, Removes State Farm’s Calif., Texas Subsidiaries From Under Review

October 8, 2002

A.M. Best Co. has affirmed the financial strength ratings of B+ (Very Good) for two separately rated subsidiaries of State Farm Mutual Automobile Insurance Company, State Farm General Insurance Company (both of Bloomington, IL) and State Farm Lloyds (Dallas, TX) and removed them from under review. The outlooks for the ratings are negative.

These rating actions reflect each company’s strategic role as a member of the State Farm Group and the ongoing parental capital commitment. Recently, in the third quarter of 2002, the parent provided funding in the amount of $200 million for State Farm General and $400 million for State Farm Lloyds in exchange for surplus notes issued by each company. These actions by State Farm followed the deterioration in operating results and corresponding declines in statutory surplus.

In the case of State Farm General – the group’s dedicated writer of property coverage in California – surplus had declined by close to 40 percent from year-end 2000 through the first six months of 2002. These results were driven by increasing loss costs and a corresponding increase in average severity, coupled with market share pricing decisions. In response, State Farm General increased rates where applicable and issued a moratorium on new business.

As for State Farm Lloyds-the group’s dedicated Texas property writer-the third quarter 2002 surplus note funding is part of a consolidated surplus note, which includes funding of $350 million in November of 2001 and $300 million during the first quarter of 2002. Like State Farm General, State Farm Lloyds has issued a moratorium on new business and increased rates substantially.

Furthermore, the company was allowed to implement the State Farm countrywide homeowners policy form effective with September 2002 renewals.

The parent’s commitment to these entities has been strong and the actions taken by State Farm General and State Farm Lloyds should contribute to a stabilization of operating results over the long term; nevertheless, A.M. Best anticipates the need for ongoing parental support given the lackluster operating performance for both companies and the challenging market conditions in Texas and California.

The financial strength ratings of A++ (Superior) for the following members of the State Farm Group are unaffected:

*State Farm County Mutual Insurance Company of Texas
*State Farm Fire and Casualty Company
*State Farm Mutual Automobile Insurance Company

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