State Farm Mutual and subsidiaries receive downgraded outlooks

What's behind the companies' adverse forecasts?

State Farm Mutual and subsidiaries receive downgraded outlooks

Insurance News

By Kenneth Araullo

State Farm Mutual and several of its subsidiaries have received downgraded financial outlooks from AM Best.

The affected companies include State Farm Group (which includes State Farm Fire and Casualty and State Farm County Mutual), State Farm Florida, MGA Insurance, State Farm General, and State Farm Life. Only State Farm Lloyds, HiRoad Assurance, and State Farm Indemnity retained stable outlooks from the credit agency.

The negative outlooks assigned to the property/casualty rating units primarily stem from recent adverse underwriting experiences in the private passenger auto insurance sector. Additionally, a challenging regulatory environment has limited State Farm’s – and industry peers’ – ability to timely increase premium rates.

Continued heightened catastrophe-related loss experiences across various regions, especially from weather-related events like hurricanes, winter and convective storms, and wildfires, have further strained the group’s operating performance assessment. The negative outlook on State Farm Life also aligns with the negative outlook on State Farm Group, considering potential ratings lift for State Farm Life due to implicit support from State Farm Group.

That said, AM Best said that the group’s ratings still underscore its robust balance sheet strength. This assessment is supported by strong operating performance, a highly favorable business profile, and sound enterprise risk management (ERM) practices. The ratings also consider State Farm Group’s consistent, albeit occasionally volatile, underwriting and operating performance, and its ability to generate internal capital, significantly influenced by the growth in the value of its equity investment portfolio despite challenging market conditions.

Despite recent dips in operating performance, State Farm Group’s balance sheet strength remains at the strongest assessment level, underpinned by its robust risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio. Moreover, the group’s capitalization witnessed an uptick in the first half of 2023 due to a substantial increase in stock market valuations. While State Farm experienced underwriting losses in its personal automobile line in 2022 and the first half of 2023, in line with the broader automobile insurance industry, AM Best anticipates a return to profitability and believes that capital market volatility will not significantly impact its risk-adjusted capitalization or business operations.

The ratings of State Farm Mutual’s subsidiaries and affiliates benefit from shared services, common management, cross-selling opportunities, effective ERM, common distribution channels, and strong brand recognition. However, these positive aspects are partly offset by State Farm Group’s underwriting variability, higher exposure to equity market volatility, and susceptibility to weather-related events and other natural catastrophes.

Recently, AM Best also downgraded the US homeowners’ insurance segment outlook due to a sustained three-year period of net underwriting losses in the US homeowners’ insurance segment, exacerbated by a rise in natural catastrophes in the first half of 2023 and coupled with persistent market challenges.

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