A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and downgraded 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+” and the debt rating to “bbb” from “bbb+” on $100 million of 6.25% senior unsecured notes due 2013, issued by State Auto’s intermediate holding company, State Auto Financial Corporation (STFC) [NASDAQ: STFC]. The outlook for all ratings is stable. The above named companies are headquartered in Columbus, OH. (See below for a detailed listing of the companies.)
The ICR and debt downgrades are based on State Auto’s deterioration in underwriting results, operating earnings and policyholder surplus in recent years, driven by an increased frequency and severity of property catastrophe losses.
The ratings reflect State Auto’s strong risk-adjusted capitalization, long-standing regional market presence, well-established agency relationships, solid brand name recognition and diversified product offerings. State Auto also benefits from its software technology, which further enhances and cultivates agency relationships while improving overall operating efficiencies. Solid investment income, expanded pricing models, as well as improved risk management have contributed to modest operating earnings over the previous five-year period. The ratings further reflect the financial flexibility and access to capital through STFC.
State Auto’s negative rating factors include its exposure to localized tornado/hail storms and hurricane activity. These exposures historically have been mitigated through comprehensive reinsurance programs and available credit facilities as well as underwriting initiatives aimed at reducing catastrophe exposures. However, the increased frequency and severity of storm losses in recent years has adversely impacted State Auto’s underwriting profitability, overall earnings and policyholder surplus. In addition, the group’s underwriting results remain pressured by its above average underwriting expense ratio, primarily related to agents’ commissions.