Best Upgrades State Farm General Insurance Co.’s Ratings

June 9, 2011

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A’ (Excellent) from ‘A-‘ (Excellent) and issuer credit rating (ICR) to “a” from “a-” of State Farm General Insurance Company, and has revised the outlook for both ratings to stable from positive.

Best also affirmed the FSRs of ‘A++’ (Superior) and ICR of “aa+” of State Farm Group and its members, as well as State Farm Life Group and its members. In addition Best affirmed the FSRs and ICR of Dallas-based State Farm Fire and Casualty Company, State Farm Lloyds, as well as State Farm Indemnity Group and its member and State Farm International Life Insurance Company, Ltd. (Bermuda). All companies are headquartered in Bloomington, IL, except where specified. The outlook for these ratings is stable, except for the outlook of State Farm Indemnity Group, which is negative.

Best said the “rating upgrades for State Farm General are based on its strong risk-adjusted capitalization, favorable earnings trend, excellent business profile and the company’s strategic importance to its parent, State Farm Mutual Automobile Insurance Company. The ratings also benefit from the explicit support State Farm General receives from State Farm Mutual.”

As partial offsetting factors Best cited “State Farm General’s concentration of risk in the California homeowners’ insurance market, which exposes the company to loss from extreme weather related events and earthquakes, as well as changes in the regulatory and economic environment in California and localized competitive market pressure.”

Best also noted that “State Farm General’s capitalization has improved over the last few years from strong operating results driven by profitable underwriting supplementing net investment income. The favorable underwriting experience is reflective of the company’s improved rate adequacy, tighter underwriting guidelines and a lack of significant catastrophe activity.

“The business profile is unsurpassed due to State Farm General’s affiliation with State Farm Mutual, which provides strength of brand, market penetration, customer loyalty and an efficient marketing and distribution system. The ratings also recognize State Farm Mutual’s demonstrated financial commitment having previously contributed $200 million in exchange for a surplus note and continuing to provide significant catastrophe reinsurance protection.”

In addition Best indicated that the “ratings of State Farm Group are based upon the consolidation of State Farm Mutual, its U.S. subsidiaries and affiliated property/casualty insurance companies. However, the group ratings apply only to State Farm Mutual and State Farm County Mutual Insurance Company of Texas (Dallas, TX). The latter company is afforded the group rating primarily due to its integration into State Farm Group’s operations and strategic plans as well as its significant reinsurance protection and common management with State Farm Mutual.

“The ratings and outlook are reflective of State Farm Group’s superior risk-adjusted capitalization, above average balance sheet liquidity, extensive geographic diversification, generally favorable earnings and its dominant business profile with strength of brand and market presence as the largest property/casualty writer in the United States. The companies benefit from a mutual ownership structure and the establishment of specific legal entities strategically placed in high risk areas to manage risk and mitigate loss of surplus.”

Best noted that in its opinion State Farm Group maintains a significant capital base that “is more than supportive of its underwriting, investment and business risks. Underwriting leverage is modest relative to industry norms and the balance sheet exhibits above average liquidity, which has been supported by strong operating cash flows and overall stable reserve development. State Farm Group’s mutual ownership structure alleviates significant pressure on operating returns to stakeholders compared to peers with stock ownership structures.

“State Farm Group’s superior market presence is the result of its excellent brand-name recognition, cost-efficient exclusive agency force, strong customer loyalty and diversified financial service capabilities. The group has created a considerable competitive advantage through its size and ability to provide quality claims handling, bundling of products and services, as well as cost-reducing incentives to long-term valued customers on a nationwide basis.”

However, Best also noted that these strengths are partially offset by State Farm Group’s “below average earnings due to underwriting losses and lower investment income. Underwriting losses have been attributed primarily to rising homeowners’ claims from a trend of more frequent and severe weather related events in addition to competitive pricing and rising automobile personal injury claims costs.

“The group’s results in recent years also have been adversely impacted by a rich accident benefit system in the turbulent Ontario auto market. In addition, State Farm Group’s investment income growth has been challenging due to the financial crisis of 2008, persistently low interest rates and higher claims severity. These concerns are partially mitigated by a strong enterprise risk management program and actions being taken to improve earnings.

“State Farm Life’s ratings recognize that it is an integral member of State Farm Group, marketing 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 strong 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 secondary guarantees. In addition, 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 further penetrate State Farm Group’s vast property/casualty customer base and manage its interest-sensitive liabilities through the continued low interest rate environment. State Farm Life is focused on improving the penetration of the enterprise’s large property/casualty customer base and continues to explore cross-selling opportunities through its non-insurance operations. With the continuing low interest rate environment, State Farm Life faces spread compression and reinvestment challenges in its fixed annuity portfolio.”

Best summarized the ratings included in its analysis as follows:
The FSR of A++ (Superior) and ICR of “aa+” have been affirmed for State Farm Group and its following members:
— State Farm Mutual Automobile Insurance Company
— State Farm County Mutual Insurance Company of Texas

The FSR of A++ (Superior) and ICR of “aa+” have been affirmed for the following life/health companies of State Farm Life Group:
— State Farm Life Insurance Company
— State Farm Life and Accident Assurance Company

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 Group and its member, State Farm Indemnity Company.

The FSR of B++ (Good) and ICR of “bbb” have been affirmed for State Farm Lloyds.

The FSR of A+ (Superior) and ICR of “aa” have been affirmed for State Farm International Life Insurance Company Ltd.

Source: A.M. Best

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