Another Downgrade for State Farm General: S&P Lowers Rating to A-

Earlier this month, Standard & Poor’s Global Ratings announced another downgrade for State Farm General Insurance Co., lowering the California company’s financial strength rating to A- in spite of a show of financial support from its parent.

In May, S&P had lowered its financial strength and issuer credit ratings of the California affiliate of State Farm Mutual Automobile Insurance Company downward by two notches—to A+ from AA— leaving the ratings on CreditWatch with negative implications.

On Aug. 4, S&P lowered the ratings two more notches—to A- from A+, this time removing the Credit Watch negative status—even though casual observers might see 400 million reasons not to take this action.

State Farm General Insurance recently received a $400 million investment from its parent in the form of surplus note, S&P reported in an Aug. 4 announcement. In spite of that extra capital, S&P said State Farm General’s “significant exposure to natural catastrophe risk will continue to add volatility to both earnings and capital.”

Leading up to the latest action, S&P had originally put the ratings on CreditWatch Negative in late February, citing weak underwriting performance over the past five years that has eroded the company’s capital position and impacted regulatory solvency ratios.

While offering a similar assessment of underwriting results in the May downgrade announcement, that move seemed to hinge more squarely on the relationship between the affiliate and the parent.

“The rating action indicates uncertainties related to capital support from the State Farm group,” the May announcement said. This, in turn, impacted S&P’s “group status assessment,” which the rating agency has changed to “strategically important” from “core.”

Fast forward to August. Some of the uncertainty about parental support seems to have dissipated. “We think the [$400 million] capital infusion will help improve SFGI’s [State Farm General’s] regulatory solvency ratios and stabilize its capitalization at the 99.5 percent confidence level under our risk-based capital adequacy model,” S&P said in the Aug. 4 announcement.

S&P said its current assessment “also considers recent rate increases and the company’s initiatives to reduce exposure in catastrophe-prone areas.”

In May, on the same day that S&P announced its first two-notch downgrade of the year, State Farm General received approval of emergency interim rate increases, effective June 1, 2025. (The approved increases were 17% for the non-tenant HO-3 line, 15% for renter/condo policies and 38% for rental dwelling policies.)

Final approval of the full requested rates is still pending, S&P reported.

“Our base-case scenario assumes that the rate increases are ultimately approved,” S&P stated, noting the possibility that the final approved rates actually turn out to be lower. That eventuality that would require the California insurer to return some overcharged premiums to policyholders, with interest, S&P noted, without indicating that this would prompt another rating agency action.

Arguing for the emergency rate increases over the course of many months, State Farm General had pointed to its distressed condition and the prospect of a multiple-notch downgrade in order to stress the urgency of the situation. In particular, witnesses testifying for State Farm General and the California Department of Insurance at a hearing before an Administrative Law Judge in April said that a downgrade to State Farm General’s S&P financial strength rating to a level below BBB could harm policyholders with mortgages who may require insurance from insurers with stronger ratings.

So far, S&P doesn’t seem to be contemplating that.

“The stable outlook reflects our view that SFGI’s capital position will remain satisfactory, that its operating performance will improve, and that it will maintain its position as the largest homeowners’ insurance carrier in California,” S&P’s most recent rating announcement says.

Commenting on what factors could prompt the rating agency to lower ratings “in the next two years,” S&P said that could happen if the carrier’s “capital position deteriorates below the satisfactory level and we think it will not be able to improve its financial condition, and if it also looks like State Farm Mutual is going to cut off the lifelines. Restated, in S&P’s language, the second condition is that “there is also uncertainty about State Farm Mutual’s willingness to provide further capital support, or if we view that SFGI’s importance weakens such that we revise our view of its group support.”

On a positive note, S&P said, “We believe that the attributes previously considered in our comparable ratings analysis, including the company’s strong brand recognition and leading market share, are adequately reflected in our current view” of the carrier’s business profile and in S&P’s assessment of its significance to the group.

“Although unlikely in the next two years, an upgrade would depend on a material and sustained improvement in the company’s capital position and operating performance” and a view that State Farm General’s importance to the group—now viewed as “strategically important” rather than “core”—has materially improved.

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