A.M. Best Affirms Financial Strength Rating And Downgrades Issuer Credit Ratings Of State Automobile Mutual Insurance Company And Its Operating Subsidiaries

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.

State Auto has recently implemented numerous strategic initiatives 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 wind and hail deductibles, an enhanced insurance-to-value program, the increased use of property catastrophe and quota share reinsurance and agency management actions.

While the outlook is stable, negative rating actions could occur if State Auto has a continuation of operating losses and/or deterioration in risk-adjusted capitalization, driven by weather-related catastrophe losses.

The FSR of A (Excellent) has been affirmed 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
  • Farmers Casualty Insurance Company
  • State Auto Insurance Company of Ohio
  • Meridian Citizens Mutual Insurance Company
  • Patrons Mutual Insurance Company of Connecticut
  • Litchfield Mutual Fire Insurance Company
  • Beacon National Insurance Company
  • Meridian Security Insurance Company
  • State Auto Florida Insurance Company
  • State Auto Insurance Company of Wisconsin
  • Beacon Lloyds Insurance Company
  • 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. Key criteria utilized include: “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”; and “Understanding BCAR for Property/Casualty Insurers.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, 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 © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.

Copyright Business Wire 2010

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