AM Best has downgraded its Financial Strength Rating (FSR) and Long-Term Issuer Credit Rating (Long-Term ICR) for State Farm General Insurance Company.
The ratings agency announced that it has lowered State Farm General’s FSR from A (excellent) to B (fair) and its Long-Term ICR from “a” (excellent) to “bb+” (fair). The rating agency has also revised its outlook for the insurer’s FSR from stable to negative. AM Best’s outlook for State Farm General’s Long-Term ICR is also negative.
The revised ratings “reflect State Farm General’s balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management (ERM),” the ratings agency said.
AM Best said the downgrades reflect “continued deterioration” in the insurer’s policyholder surplus as of Dec. 31, which drove a corresponding drop in overall risk-adjusted capitalization and “weakening balance sheet metrics.”
A significant driver of that decline was a sharp increase in claims severity impacting State Farm General’s umbrella and commercial multi-peril lines, AM Best said.
“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 industry peers” to increase premium rates in a timely fashion,” AM Best said. “While management is taking corrective actions to stabilize its balance sheet strength, these actions will need time to gain positive traction over the intermediate term.”
State Farm General recently announced its intention to pull out of 72,000 California insurance policies, a decision driven by factors including inflation, the increasing frequency of natural disasters, and regulatory burdens.
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