S&P downgrades State Farm General’s FSR to A-plus

By Chris Munro

May 15 - (The Insurer) - S&P Global Ratings has cut State Farm General Insurance Co (SFGI)’s financial strength and issuer credit ratings to A-plus from AA because of “uncertainties related to capital support” from the California-focused carrier’s parent.

Both the financial strength and issuer credit ratings remain on CreditWatch with negative implications. That CreditWatch will be resolved once S&P receives more information on any capital infusion and timing, the agency said.

Alongside the ratings downgrades, S&P has assessed SFGI to be strategically important to the State Farm group due to uncertainty regarding group capital support from the parent.

SFGI is an operating subsidiary of State Farm Mutual Automobile Insurance Co that operates solely within the Golden State. Three-quarters of the $4.0 billion of direct premiums written that SFGI wrote in 2024 came from the homeowners segment.

As S&P explained, SFGI has reported weak underwriting performances over the past five years, and the carrier is facing potential earnings and capital pressures in 2025, largely due to the impact of the wildfires that tore through parts of Southern California earlier this year, notably in and around Los Angeles County.

Those wildfire losses resulted in SFGI’s capital deteriorating to near the regulatory authorized control level (ACL), S&P noted.

While factoring in those issues, S&P said its rating actions, which were announced on Tuesday, also considered that during this time of underperformance and declining capital at SFGI, its parent State Farm group has not provided any capital support to California-focused carrier beyond reinsurance agreements.

S&P said it also considered the California Insurance Department's ambiguity around rate approval, although on Tuesday the regulator announced it had approved SFGI to impose an interim emergency rate increase provided parent State Farm undertake a $400 million capital infusion into the carrier.

The ratings agency said given the inherent lag for an earned rate to meaningfully materialise, it expects it will be at least 12 months before SFGI begins to realise the benefits of what at the time of its announcement on Tuesday were the carrier’s potential rate increases.

In confirming the ratings downgrade, S&P noted that SFGI “has been vigilant in taking non-rate actions to manage exposure, particularly to wildfires”.

However, the ratings agency said that has not been enough to offset the elevated severity and frequency affecting the carrier’s book.

Evidence of how the carrier has been impacted by that elevated frequency and severity can be seen in SFGI’s average combined ratio of 117.6% for the past years. In 2024, SFGI booked a combined ratio of 119.6%, reflecting increased catastrophe losses which were exacerbated by higher inflation.

“Because of underwriting losses, SFGI's ACL risk-based capital ratio declined to 150% at year-end 2024, compared with 501% at year-end 2021,” said S&P.

“With the California wildfire losses and loss adjustment expenses (LAE) of around $228 million, and expected FAIR Plan loss and LAE exposure of around $400 million, we expect the ratio to decline further in 2025,” the agency added.