Best Affirms State Farm Mutual, Affiliates & Subs Ratings

June 4, 2012

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aa+” of State Farm Mutual Automobile Insurance Company (SFMAIC) and its affiliate, State Farm County Mutual Insurance Company of Texas. Best also affirmed the FSRs and ICRs of SFMAIC’s property/casualty and life insurance affiliates and subsidiaries.

The outlook for all of the ratings is stable, except those of State Farm Indemnity Company (SFIND), which has a negative outlook. All companies are domiciled in Bloomington, Illinois, unless otherwise specified.

The ratings for SFMAIC reflect “its strong risk-adjusted capitalization, generally favorable earnings and its superior business profile,” Best explained. “SFMAIC and its property/casualty and life insurance affiliates and subsidiaries comprise the largest personal lines insurance group in the United States based on direct premiums written and the second-largest in terms of policyholders’ surplus.

“The entire organization comprises the State Farm Group, which is the leading provider of homeowners’ and private passenger automobile insurance in the United States and is one of the top five insurers in the Canadian provinces of Ontario, Alberta and New Brunswick. The property/casualty companies within the State Farm Group focus on either private passenger automobile insurance or homeowners insurance.”

However, Best also indicated that “commercial multi-peril, commercial auto liability, workers’ compensation and other lines of business are written, and banking and other financial services are offered through life insurance and property/casualty subsidiaries to enhance the sale of personal lines products. Distribution and service through an extensive exclusive independent agency force and consistent, high quality claims handling has resulted in bundling of products and services, high customer satisfaction rates and better than average expense ratios. The property/casualty affiliates and subsidiaries of SFMAIC also benefit from the parent’s financial strength through intercompany reinsurance and lines of credit.”

As partially offsetting these positive factors Best cited the organization’s “below average profitability, above average investment leverage in equities and the current low interest rate environment. Profitability has been adversely impacted by underwriting losses incurred on the homeowners’ lines in recent years from an increase in the frequency and severity of weather-related events across the United States and Canada.”

In addition, Best explained that automobile lines over the last five years “have been adversely impacted by rising personal injury protection claims costs, competitive pricing and generous claims benefits in the Ontario market.

“Furthermore, low interest rates and higher claims payments are challenging SFMAIC to increase investment income while its above average investment in common stocks exposes surplus to market volatility.”

These concerns in turn are “partially mitigated by actions being taken by management to improve underwriting, reduce risk and enhance the customer experience,” Best said. “State Farm Group also employs an extensive enterprise risk management program that continues to evolve and contributes to improving earnings and protecting surplus.

“A negative outlook could result for the property/casualty companies of State Farm Group if operating performance and capitalization levels were to significantly deteriorate. A more favorable operating trend that leads to capital appreciation would further stabilize the ratings.”

Best explained that its negative outlook on SFIND is “due to its unfavorable earnings over the past five years. However, the ratings benefit from SFIND’s strategic role within State Farm Group as its primary automobile insurer in New Jersey, its integration into State Farm Group’s business plans and operations through shared services agreements and agent training programs, as well as other contractual arrangements between the company, its parent and other affiliates.

“SFIND’s ratings may become stable with continued profitable operating performance that leads to a favorable trend in capital appreciation without excessive growth. However, additional pressure may be put on the ratings if operating performance falters or capitalization weakens.

Best indicated that the affirmations of the FSR of ‘A++’ (Superior) and ICRs of “aa+” for State Farm Life Insurance Company and State Farm Life and Accident Assurance Company, both of which comprise the State Farm Life Group, recognize that “the companies are integral members of the 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 longer-term 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 noted 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 the 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 also has affirmed the FSR of ‘A+’ (Superior) and ICR of “aa” of Bermuda-based State Farm International Life Insurance Company Ltd. (SFI).The ratings acknowledge SFI’s “strong risk-adjusted capitalization, high quality fixed-income investment portfolio, generally positive (although fluctuating) operating performance and steady net premium growth,” Best said. “Partially offsetting these strengths are the challenges to grow its insurance business in the highly competitive Canadian life insurance marketplace.”

In conclusion Best indicated it “believes State Farm Life and SFI are well-positioned at their current ratings for the foreseeable future. However, downward rating actions may occur should SFMAIC experience a material decline in its financial strength.”

Best summarized the ratings affected by its actions as follows:
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 General Insurance Company.
The FSR of ‘A-‘ (Excellent) and ICR of “a-” have been affirmed for State Farm Indemnity Company.
The FSR of ‘B++’ (Good) and ICR of “bbb” have been affirmed for State Farm Lloyds

Source: A.M. Best

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