A.M. Best Co. has affirmed the financial strength ratings (FSR) of A++ (Superior) and issuer credit ratings (ICR) of "aa+" of State Farm Group (State Farm), its property/casualty members and core life affiliates. A.M. Best also has affirmed the FSRs and ICRs of other select property/casualty members and life affiliates. The outlook for these ratings is stable. Nearly all State Farm companies are headquartered in Bloomington, IL. (See below for a detailed list of the companies and ratings.)
The ratings reflect State Farm's superior capitalization, moderate five-year operating performance and dominant business profile with strength of brand and market presence as the largest property/casualty writer in the United States. State Farm maintains a significant capital base with correspondingly modest underwriting leverage relative to industry norms. State Farm's moderate five-year operating earnings were driven by solid investment income, which was partially offset by underwriting losses. These retained operating earnings, in conjunction with realized and unrealized capital gains from its substantial equity portfolio, have led to modest surplus growth and reduced underwriting leverage. In addition, State Farm maintains sound balance sheet liquidity and consistently strong operating cash flows. State Farm also benefits from its mutual ownership structure, which affords significantly less pressure in terms of operating returns compared to its publicly traded peers.
State Farm's market presence is the result of its tremendous brand name recognition, cost-efficient exclusive agents, strong customer loyalty and diversified financial service capabilities. With State Farm's ability to provide quality claims handling, bundling of products and services, as well as cost-reducing incentives to long-term valued customers, it has created a considerable competitive advantage. State Farm has dedicated property/casualty companies in California, Florida and Texas, three of its highest catastrophe prone states, which has increased its flexibility to mitigate and manage its exposure to frequent and severe weather-related losses.
Partially offsetting these positive rating factors are State Farm's deteriorating operating performance in recent years due to exposure to frequent and severe catastrophe losses and susceptibility to equity market fluctuations. Increased underwriting losses were reflective of greater homeowner catastrophe losses, and to a lesser extent, rising private passenger automobile loss costs. The greater catastrophe losses were primarily attributable to Hurricanes Ike and Gustav in 2008, and a heightened frequency and severity of windstorms in the South and Midwest in 2008 and 2009. The rising private passenger automobile loss costs were attributable to higher bodily injury and personal injury protection loss severities due to medical inflation and higher physical damage loss severities as a result of increased repair costs.
However, management has recently implemented strategic initiatives to improve underwriting results, which included private passenger automobile and homeowner rate increases in numerous states. In addition, State Farm is susceptible to equity market fluctuations as approximately 30% of its invested assets are allocated to unaffiliated common stock. This was evident in 2008, when State Farm's surplus declined $10.4 billion, primarily due to $9.7 billion in unrealized capital losses, which were driven by a decline in the value of its unaffiliated stock portfolio due to unfavorable equity market conditions. However, State Farm's unaffiliated common stock portfolio is well diversified and has recently partially rebounded as a result of improved equity market conditions.
State Farm Life Insurance Company (State Farm Life) represents the core life insurance affiliate of State Farm. The ratings reflect A.M. Best's opinion that State Farm Life is an integral member of State Farm, marketing a wide array of protection and asset accumulation products, while benefitting from the competitive advantages derived from State Farm's exclusive multi-line career agency system. The ratings also recognize State Farm Life's superior stand-alone risk-adjusted capitalization and profitable operating performance primarily generated from its stable core ordinary life segment.
Partially offsetting these positive factors are the challenges to further penetrate State Farm's vast property/casualty customer base and manage its interest-sensitive liabilities, including its closed blocks of variable universal life and annuities through the continued low interest rate and volatile equity market environments. A.M. Best also acknowledges State Farm Life's elevated commercial real estate exposure through its investments in direct commercial loans and commercial mortgage-backed structured securities (CMBS). A.M. Best believes State Farm Life could experience impairments should the commercial real estate market continue to deteriorate. Thus far, State Farm Life's well-diversified direct commercial loans have performed well, and its CMBS are entirely in the highest rated tranches, mainly earlier vintages with a high degree of subordination.
State Farm Life and Accident Assurance Company markets the same product portfolio as State Farm Life through the same exclusive multi-line career agency system, with a focus entirely in New York and Wisconsin.
The FSRs of A++ (Superior) and ICRs of "aa+" have been affirmed for State Farm Group and its following property/casualty members and core life affiliates:
- State Farm Mutual Automobile Insurance Company
- State Farm County Mutual Insurance Company of Texas
- 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, a property/casualty member of the State Farm Group.
The FSR of B++ (Good) and ICR of "bbb" have been affirmed for State Farm Lloyds, a property/casualty member of the State Farm Group.
The FSR of A+ (Superior) and ICR of "aa" have been affirmed for State Farm International Life Insurance Company Ltd., a life affiliate of the State Farm Group.
For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.
The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.
Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.
Contacts:
A.M. Best Co.
Analysts:
Kenneth Tappen—P/C,
908-439-2200, ext. 5248
kenneth.tappen@ambest.com
or
Steven
Faulks—L/H, 908-439-2200, ext. 5035
steven.faulks@ambest.com
or
Public
Relations:
Rachelle Morrow, 908-439-2200, ext. 5378
rachelle.morrow@ambest.com
or
Jim
Peavy, 908-439-2200, ext. 5644
james.peavy@ambest.com