Best Affirms State Farm Companies, Affiliates and Subs Ratings

May 31, 2013

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, as well as the FSRs and ICRs of SFMAIC’s property/casualty and life insurance subsidiaries and affiliates. The outlook for these ratings is stable.

Best has also revised the outlook to stable from negative and affirmed the FSR of ‘A’- (Excellent) and ICR of “a-” of State Farm Indemnity Company (SFIND), and the ICR outlook to positive from stable and affirmed the FSR of ‘A’ (Excellent) and the ICR of “a” of State Farm General Insurance Company (SFGIC). The outlook for the FSR is stable.

The entire organization is referred to as the State Farm Group. All companies are headquartered in Bloomington, Illinois.

“The ratings for SFMAIC are reflective of its strong risk-adjusted capitalization, generally positive earnings and its superior business profile,” Best explained. “Risk-adjusted capitalization continues to be supportive of its ratings, and earnings have been positive despite the prolonged, low interest rate environment and increased frequency of severe storm activity across the United States, including the wildfires in Colorado, Texas and other Southern and Southwestern states.

“In addition, SFMAIC and 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.”

Best also noted that the “State Farm Group 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 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 of the subsidiaries and affiliates of SFMAIC also benefit from shared services, common management, cross selling of products and services, common distribution, brand name recognition and an enterprise risk management program.”

As partial offsetting factors Best cited the “State Farm Group’s below average earnings, above average exposure to equity market volatility and continued low interest rates.” The report explained 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 as well as increasing automobile personal injury claims costs.

“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; upgrade and modernize systems and expand production through alternative distribution channels.”

Best said it revised the outlook for the ICR of SFGIC “as a result of its sustained financial strengthening from a favorable earnings trend over several years as well as its leadership position in the California homeowners’ market. The company’s ICR may be upgraded if this trend continues.

“The outlook for the ratings of SFIND was revised primarily due to improved operating performance and stronger risk-adjusted capitalization each of the last two years as the company navigates through the difficult New Jersey automobile market.

“The outlook for the ratings of SFMAIC may be revised to negative if the company’s operating performance and capitalization levels were to significantly deteriorate. However, a more favorable operating trend that leads to sustained capital appreciation without excessive growth would further stabilize the ratings.”

Best also explained that the “affirmations of the ratings for State Farm Life Insurance Company and State Farm Life and Accident Assurance Company, both of which comprise the State Farm Life Group (State Farm Life), recognize that these companies are integral members 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 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. 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.

“Partially offsetting these positive rating factors are 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. With the continuing low interest rate environment, State Farm Life faces spread compression and reinvestment challenges in its fixed annuity portfolio.”

Best has also affirmed the ratings of State Farm International Life Insurance Company Ltd. (SFI) (Bermuda). “These 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. Partially offsetting these strengths are the challenges SFI faces to grow its insurance business in the highly competitive Canadian life insurance marketplace,” said the report.

Best also indicated that it “believes State Farm Life and SFI are well-positioned at their current rating levels for the foreseeable future. However, downward rating actions may occur should SFMAIC experience a material decline in its financial strength and if SFI becomes of less strategic importance to its parent.”

The report summarized the companies and debt ratings included in Best’s rating 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 ‘B++’ (Good) and ICR of “bbb” have been affirmed for State Farm Lloyds.
The FSR of ‘A++’ (Superior) and ICRs of “aa+” have been affirmed for State Farm Life Insurance Company and State Farm Life and Accident Assurance Company.
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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