A.M. Best Downgrades FSR for State Farm Florida Insurance Co., Removes from Under Review
A.M. Best Co. has downgraded the financial strength rating to B+ (Very Good) from A- (Excellent) for State Farm Florida Insurance Company (State Farm Florida) (Winter Haven, Fla.). The rating has been removed from under review with negative implications and assigned a stable outlook.
The rating downgrade reflects State Farm Florida’s marginal stand-alone risk-adjusted capitalization, partially offset by the support of its parent, State Farm Mutual Automobile Insurance Company. While the parent has demonstrated significant support, in A.M. Best’s view additional explicit support would have been required to maintain an Excellent rating, particularly due to State Farm Florida’s net probable maximum loss exposure.
As a result of considerable hurricane activity in 2004, State Farm Florida sustained net losses and loss adjustment expenses of $1.3 billion. The surplus impact of these losses was mitigated by the parent’s funding of two surplus notes totaling $750 million.
Additionally, the parent was a significant participant on the company’s catastrophe reinsurance program, with gross losses and loss adjustment expenses for all four storms equating to more than $3 billion for the state of Florida. Prior to the hurricane activity of 2004, State Farm Florida posted improved results, reflective of its renewed underwriting focus and rate adequacy initiatives.
Further, State Farm Florida benefits from the sustainable competitive advantages derived from its parent, which include its strong brand name recognition in the Florida marketplace and access to its exclusive agency network.
Due to its geographic business concentration, State Farm Florida’s gross probable maximum loss (PML) from a 100-year hurricane equates to multiples of its capitalization. Although the company maintains a comprehensive reinsurance program, the net PML is also high, representing more than 30% of adjusted surplus. Accordingly, the company’s stand-alone risk-adjusted capitalization is marginal.
Although the parent has provided significant support as noted, A.M. Best believes further support may be required in the case of a significant catastrophic event. Based on the parent’s history of supporting the majority of its separately capitalized, stand-alone subsidiaries, A.M. Best expects that State Farm Florida’s claims-paying ability will be maintained in both the near and intermediate terms.