S&P Global Ratings has lowered State Farm General Insurance’s (SFGI) financial strength and issuer credit ratings to ‘A+’ from ‘AA’, citing a significant deterioration in the company’s capital regulatory solvency ratios.
The ratings remain on CreditWatch with negative implications. CreditWatch is S&P’s system used to indicate that a company’s credit rating may be at risk of changing in the near future .
S&P took this credit action in response to SFGI’s weak underwriting performance over the past five years, which has led to a significant deterioration of its capital position and regulatory solvency ratios.
According to the rating agency, this was largely from the recent California wildfires and led to capital deteriorating near the regulatory authorized control level (ACL).
In its statement, S&P highlighted that the State Farm group has not provided any capital support to SFGI beyond reinsurance agreements during this period of underperformance.
The agency stated: “SFGI is an operating subsidiary of State Farm Mutual Automobile Insurance Co. (AA/Stable/–) that does business almost exclusively in California, with 75% of SFGI’s total $4.0 billion in 2024 direct premiums written from the homeowners business.
“SFGI’s ability to achieve rate adequacy is limited because of regulatory restrictions in California on personal lines. SFGI has been vigilant in taking non-rate actions to manage exposure, particularly to wildfires, but it hasn’t been enough to offset the elevated severity and frequency affecting the book.”
Over the past five years, SFGI reported an average combined ratio of around 117.6%. In 2024, the combined ratio remained slightly above average, at 119.6%, due to claims from higher catastrophe losses, exacerbated by higher inflation.
Due to underwriting losses, State Farm General Insurance’s (SFGI) ACL risk-based capital ratio fell to 150% at the end of 2024 from 501% at the end of 2021.
Expected wildfire and loss adjustment expenses (LAE) of around $228 million, and expected FAIR Plan loss and LAE exposure of around $400 million, will likely cause a further decline in 2025.
S&P acknowledged that SFGI has pending rate increases since June 2024 and received provisional approval for emergency interim rate increases in March, effective June 1. A final approval is currently pending following a rate hearing in April.
“Our base-case scenario is that the rate increases are ultimately approved and that there will be capital support from the State Farm group. Given the inherent lag for an earned rate to meaningfully materialize, we expect it will take at least 12 months to realize the benefits of these potential rate increases.”
Despite the downgrade, S&P recognised SFGI’s satisfactory business risk profile, underpinned by its “strong brand recognition, and leading market share in the California homeowners’ insurance market.” The agency also expects SFGI to remain committed to the California homeowners market.
The decision to maintain SFGI on CreditWatch with negative implications reflects the company’s weakening financial fundamentals and ongoing uncertainty regarding the State Farm group’s willingness to provide capital support.
S&P noted: “We expect to resolve the CreditWatch once we have more information on any capital infusion and timing that could strengthen SFGI’s ACL risk-based capital ratio and lead us to refine our stand-alone credit profile.
“Upon resolution of the CreditWatch listing, based on SFGI’s stand-alone credit and our assessment of the group status, we could lower the rating by multiple notches.”
