Best Affirms Ratings of State Farm Group

A.M. Best Co. announced that it has affirmed the financial strength ratings of the property/casualty and life affiliates of the State Farm Group, and has revised the negative rating outlooks assigned to certain subsidiaries to stable.

According to the mutual company’s Web site, the group is in Best’s highest rating category of “A++.” Subsidiary companies within the group are rated separately. Standard & Poor’s rates State Farm “AA” and Moody’s “Aa1.”

“The rating for State Farm Group reflects its strong risk-adjusted capitalization, well-recognized franchise and significant presence in the U.S. property/casualty market. Despite surplus volatility over the last several years, the group maintains a significant capital base with a correspondingly modest underwriting leverage position,” said Best.” In response to previously unfavorable operating results, management implemented a number of strategic initiatives, including a renewed focus on underwriting profitability, managed growth objectives and most importantly, improved rate adequacy.

“As a result of these initiatives, along with the favorable development of prior year losses, the group’s year-end 2003 results improved considerably with a 14 point reduction in the combined ratio and a more than $5 billion increase in pre-tax operating income from the prior year,” the bulletin continued.

Best noted, however, that “despite improvement in 2003, the loss and loss adjustment expense ratios are somewhat elevated, particularly compared with those of similarly-rated peers. In addition, common stock investment leverage as a percentage of surplus is high at more than 80 percent. However, the portfolio is well diversified and represents less than half of overall invested assets. Based on the considerable improvement in operating performance, strong capitalization and dominant business profile, the outlook has been revised to stable”

The rating agency also said it “recognizes the strategic role of the State Farm life affiliates, which have more than adequate levels of risk-adjusted capitalization, a long-standing record in reporting consistent operating gains and maintaining a focus on providing a broad portfolio of life and annuity products to the large State Farm Group customer base”

The report concluded that “although results have improved considerably for State Farm Fire and Casualty Company, a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company (both of Illinois) and dedicated property writer for the group, A.M. Best continues to view the rating outlook for this entity as negative. The outlook primarily reflects the elevated premium leverage and correspondingly modest risk-adjusted capitalization relative to the current rating level.”