AM Best Gives State Farm a Downgrade — California to Blame

State Farm is one of the most profitable and popular insurance companies in the country. That doesn’t matter to AM Best. After State Farm told the California Department of insurance that it’s not going to renew 72,000 homeowners policies, Best dropped the downgrade bomb.

The financial strength rating went from the top rating, the excellent A to a fair B. The long-term credit rating dropped from an also excellent a to bb+ which AM Best considers, fair.

AM Best cited the strength of State Farm’s balance sheet as the reason for the downgrades. The ratings firm said it is weak.

Other rating components took a hit, too. The company’s operation performance is considered marginal and its business profile got rated neutral. The enterprise risk management of State Farm is appropriate.

“The ratings also reflect lift, as defined within Best’s Credit Rating Methodology, from its parent, State Farm Mutual Automobile Insurance Company,” the AM Best news release said.

That said, State Farm’s Financial Strength Rating (FSR) move up to the rating of stable from negative. However, the company now has a negative rating for the long-term Issuer Credit Rating (ICR).

“The continuation of the negative outlook on the long-term ICR reflects the uncertainty of the company’s ability to stabilize and strengthen its risk-adjusted capitalization given ongoing challenges regarding profitability and internal capital generation, trending adverse reserve development occurring on prior accident years, and the challenging regulatory environment within California’s marketplace that have constrained the ability of State Farm General (as well as its industry peers) to increase premium rates in a timely fashion,” AM Best noted.

The good news for State Farm is AM Best noting that the company’s management is working overtime to stabilize the balance sheet strength. Those actions, Best said, “will need time to gain positive traction over the intermediate term.”

Source link: Insurance Journal —

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