State Farm downgraded in California by major financial rating agency

San Francisco Chronicle​

6 days ago

A major credit rating agency has downgraded its rating for State Farm's California arm for the second time in just under three months, citing the insurer's 'significant exposure to natural catastrophe risk.'
In May, S&P Global Ratings had lowered State Farm General's financial strength rating from an AA to an A+ rating and warned of a potential future downgrade. This week, it took the company's rating down further, to an A-.
State Farm General is the largest home insurance company in California, covering about 15% of all homes in the state. It's also been very public about its rapidly deteriorating financial condition: In 2023, State Farm stopped writing new home insurance policies altogether, and in 2024 it began dropping nearly 30,000 homeowners.
Ratings from third-party agencies bear great significance for insurance companies because they can determine whether their clients are able to get a mortgage. Fannie Mae and Freddie Mac, which provide federally-backed mortgages, maintain minimum rating standards for insurance companies. If an insurer drops below that standard, their customers may no longer be able to get a mortgage from the same lender. Private lenders also often hold certain standards for insurance companies.
Home insurance tool: See how the biggest California home insurers are rated — and what it could mean for your mortgage
Even with the back-to-back downgrades, State Farm General still meets Fannie and Freddie's requirements to have a BBB rating or better from S&P. It does have a B rating from another credit rating agency, A.M. Best — making it one of that agency's two lowest-rated insurers in California. However, while the B rating falls below Freddie Mac's standard of a B+, companies only need to meet one rating requirement to remain acceptable for mortgage lenders.
State Farm General is the California-only subsidiary of State Farm Mutual Automobile Insurance Co., an Illinois company that itself maintains an AA rating from S&P and a A++ rating from A.M. Best.
'The outcome was anticipated, and our approach is unchanged,' the company said in a statement. 'We remain deeply concerned about the financial position of State Farm General, as it is difficult to match price to risk in California. To ensure the long-term sustainability of State Farm General, we are being diligent in our efforts to turn around the financial stability of the company.'
State Farm General's financial state was already weak headed into the beginning of this year, and was then made worse by the Los Angeles wildfires, S&P noted. The insurer has estimated it will pay $7.6 billion in claims from the Eaton and Palisades fires, though all but $400 million of that will be covered by its national parent company, State Farm Mutual, which provides reinsurance — insurance for insurance companies — to its subsidiary.
State Farm Mutual has also agreed to give State Farm General a $400 million loan to help buoy its finances — a positive factor that was taken into account during the rating assessment, according to S&P.
Their rating assumes that State Farm General will secure ultimate approval for the interim 17% home insurance rate increase that the insurer began implementing this June. The California Department of Insurance is expected to hold a hearing in October that will determine the final premium rates for State Farm, which could range from a 30% average increase to no increase at all. The latter could lead to refunds for customers whose rates have already risen.
If approved at the full amount, it would be the largest rate hike from State Farm General in at least eight years. Last year, the insurer began implementing an overall 20% rate hike on home insurance customers.
Survivors of the Los Angeles fires have continually opposed this rate increase, urging Insurance Commissioner Ricardo Lara to delay a final decision until after his department completes an ongoing investigation into allegations that State Farm has failed to properly communicate and make payments to survivors. Earlier this month, the Eaton Fire Survivors Network sent Lara a letter saying it would be 'regulatory failure' to allow the rate hike to go through before the investigation is finalized. State Farm has said it anticipates the investigation will reveal thousands of satisfied customers.
If the rate hikes do not get approved, and if State Farm General's financial position continues to deteriorate, that could lead S&P to lower the insurer's rating even further. Analysts noted the insurer could also face another downgrade if its parent company wavers in its financial support.
But for now, S&P said its outlook for State Farm General is stable, reflecting its expectation that the insurer's 'capital position will remain satisfactory, that its operating performance will improve, and that it will maintain its position as the largest homeowners' insurance carrier in California.'