A.M. Best has downgraded the financial strength rating (FSR) to A- (Excellent) from A (Excellent) and the issuer credit ratings (ICR) to “a-” from “a” of State Automobile Mutual Insurance Company (State Auto) and its operating subsidiaries. Concurrently, A.M. Best has downgraded the ICR to “bbb-” from “bbb” of State Auto’s intermediate holding company, State Auto Financial Corporation (STFC) [NASDAQ:STFC]. The outlook for all ratings has been revised to stable from negative. All the above companies are headquartered in Columbus, OH. (See below for a detailed listing of the companies.)

The ratings downgrade is based on State Auto’s unfavorable five-year underwriting and operating results relative to the private passenger standard auto and homeowners composite, the deterioration of 2014 results due to adverse development on the run-off of its large commercial trucking and commercial restaurant specialty lines programs, and the potential for 2015 results to be negatively impacted by additional adverse development on these programs.

State Auto's positive rating attributes reflect its strong risk-adjusted capitalization, long-standing regional market presence, well-established agency relationships, solid brand name recognition and diversified product offerings. State Auto's capital position is derived from its sound overall liquidity position and manageable catastrophe exposure, partially offset by above-average underwriting and common stock leverage. State Auto also benefits from its software technology, which further enhances and cultivates agency relationships, while improving overall operating efficiencies. The ratings also reflect the financial flexibility and access to capital through State Auto Financial Corporation, State Auto’s publicly traded intermediate holding company.

State Auto has implemented numerous strategic initiatives in recent years to improve underwriting results. These initiatives include rate increases in a number of states and lines of business, a reduction of property exposures in catastrophe-exposed areas, the implementation of increased property wind and hail deductibles, the implementation of an enhanced homeowner by-peril rating program, stepped up insurance-to-value efforts, the increased use of property catastrophe reinsurance and agency management actions. These strategic initiatives and reduced storm activity resulted in improved operating earnings and solid surplus growth in 2013, although underwriting results were tempered by ceded premiums from its homeowners’ quota share reinsurance contract (expired year-end 2014) and the run-off of business in its specialty lines segment.

State Auto's negative rating factors include its exposure to localized tornado/hail storms and hurricane activity. The increased frequency and severity of storm losses earlier in the previous five-year period adversely impacted State Auto’s underwriting profitability, overall earnings and surplus position. However, these exposures are mitigated through a comprehensive reinsurance program and available credit facilities, as well as underwriting initiatives aimed at reducing catastrophe exposures. In 2012, State Auto also experienced deterioration in its specialty lines segment, driven by increased losses on its large commercial trucking and commercial restaurant programs. These policies were placed into run-off during 2012, with the run-off of premiums completed by year-end 2013. However, State Auto reported an additional $140 million of adverse development on these claims in 2014, which resulted in significant underwriting and operating losses and a moderate decline in surplus at year-end 2014.

State Auto’s management has taken significant actions to prevent additional adverse loss reserve development on its large commercial trucking and commercial restaurant programs, which include bringing management on these claims in-house, performing an internal claims audit and purchasing adverse development reinsurance on its commercial restaurant program with $40 million of coverage above year-end 2014 carried reserves. Lastly, State Auto’s underwriting results remain pressured by its above-average underwriting expense ratio.

Negative rating actions could occur if there is a continuation of operating losses and/or surplus deterioration that took place over the previous five-year period, potentially driven by storm losses, adverse loss reserve development or other causes. A sustained trend of favorable underwriting and operating results relative to peers and surplus growth would be required for positive rating movement.

The FSR has been downgraded to A- (Excellent) from A (Excellent) and the ICRs have been downgraded to “a-” from “a” for State Automobile Mutual Insurance Company and its following operating subsidiaries:

  • State Auto Property and Casualty Insurance Company
  • Milbank Insurance Company
  • State Auto Insurance Company of Ohio
  • Patrons Mutual Insurance Company of Connecticut
  • Meridian Security Insurance Company
  • State Auto Insurance Company of Wisconsin
  • Rockhill Insurance Company
  • Plaza Insurance Company
  • American Compensation Insurance Company
  • Bloomington Compensation Insurance Company

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

  • Catastrophe Analysis in A.M. Best Ratings
  • Insurance Holding Company and Debt Ratings
  • Rating Members of Insurance Groups
  • Risk Management and the Rating Process for Insurance Companies
  • The Treatment of Terrorism Risk in the Rating Evaluation
  • Understanding BCAR for Property/Casualty Insurers

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

Copyright © 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

A.M. Best CompanyKenneth Tappen, 908-439-2200, ext. 5248Senior Financial Analystkenneth.tappen@ambest.comorChristopher Sharkey, 908-439-2200, ext. 5159Manager, Public Relationschristopher.sharkey@ambest.comorJoseph Burtone, 908-439-2200, ext. 5125Assistant Vice Presidentjoseph.burtone@ambest.comorJim Peavy, 908-439-2200, ext. 5644Assistant Vice President, Public Relationsjames.peavy@ambest.com

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