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Credit knock highlights insurance pressures

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Credit rating agency AM Best downgraded the financial strength rating of State Farm General Insurance Co. to B (fair) from A (excellent), according to a news release from AM Best.

Additionally, the agency downgraded the long-term issuer credit rating of the company to Bb+ (fair) from A (excellent), while revising the outlook for the long-term ICR to negative.

Springfield Business Journal published a brief about the downgrades in the March 29 installment of Today in Business. The news may have sounded closer to home than it was, however, as industry publication The Insurer explained that State Farm General Insurance Co. is the unit of the personal lines giant that provides homeowners insurance only in the state of California – meaning policyholders in Missouri were not directly impacted by the downgrade.

Nationally, however, nearly everyone is experiencing a rise in premiums. S&P Global Market Intelligence reported that in 2023, homeowners’ insurance premiums rose by more than 11%, and in the same period, the top 10 largest auto insurance underwriters each raised their premiums by double digits.

Bob Berke, owner of Bob Berke Insurance Agency Inc., a State Farm office in Springfield, offered some context for those reading about the California subsidiary’s woes.

“That’s very, very, very specific,” Berke said. “In certain states, it’s extremely difficult to do business – specifically California. It’s massively unprofitable.”

He noted State Farm General Insurance Co. is a subsidiary of Bloomington, Illinois-based State Farm Mutual Automobile Insurance Co. (a name that dates from its founding in 1922 –  today, it covers more than just automobiles).

Berke said State Farm Mutual Automobile Insurance Co. protected itself from exposure by isolating certain business entities, like State Farm General, within the larger corporation. The parent company ranked No. 44 on the Fortune 500 list of largest companies. Its website reports a net worth in 2023 of $134.8 billion.

Puneet Prakash, professor and Baker Chair of Risk Management and Insurance at Missouri State University, said as a mutual company, State Farm Mutual Automobile Insurance Co. is not listed on the stock exchange, leaving only private sources for capital raises. A costly subsidiary can be very problematic for this reason.

Prakash said State Farm General decided last year not to sell new insurance policies in California, but this year it further decided not to renew some 70,000 old policies.

“The subsidiary is not getting a lot of support from the parent,” he said. “They don’t have any choice now but to scale back their operations, if you will, so that’s what they’re doing.”

Leaning into the familial metaphor, Prakash said by distancing itself from its errant child, the parent company is trying to protect the rest of its family, like insurers in the rest of the country.

“Until they can get their own house in order, this is going to stand,” he said.

Show Me risk?
Prakash said the actions of State Farm Mutual to isolate the California-operating State Farm General has mitigated risk to the rest of its holdings.

“There was a real chance that it would have spilt over, and it could still, but the probability that this child’s credit rating will spill over to the rest of the State Farm family has just decreased,” he said. “That’s my sense of it.”

Prakash said California policies are especially costly because of the prevalence of natural disasters – specifically wildfires.

“When something like this happens, the rating agencies don’t seem to know what to do,” he said. “They start downgrading willy-nilly, and then there’s really a possibility of a spillover effect.”

Prakash said homeowners in Missouri are much better positioned than their California counterparts.

“We’ve got a pretty comfortable marketplace – we’re not being run by an oligopoly of insurance companies,” he said.

He noted the concern in Missouri used to be for tornadoes, but in the past 60 years or so, tornado alley has calmed down or perhaps shifted, with many devastating storms happening to the east in places like Kentucky.

Earthquake activity seems to be on the rise, however.

“There are more tremors which are getting recorded in Springfield and the state of Missouri,” he said. “The frequency seems to have increased, and so have premiums for earthquake insurance, at least in Springfield.”

Prakash admitted he considers his area of study to be an interesting one within the field of finance.

“You talk to the investment people, they will tell you with a lot of confidence, ‘I know this is going to happen,’” he said. “In insurance, no one can tell you. It comes down to natural disasters and other external factors. You can have data about it, but there’s no way to predict.”

Prakash said he sees another threat within the insurance world, and that’s cyber risk.

“This is where insurance companies going forward will have a difficult time figuring things out,” he said. “You can write a policy for real-world events and exclude cyber risk, or you can write a cyber risk policy and exclude real-world events, but once they start interacting and crossing boundaries, I just do not know where to go.”

Life insurance policies are another challenge to the industry, he said, as the number of buyers is decreasing.

“Many of the life insurance companies have started moving into wealth management, and that just tells me they are essentially catering to people who already have money,” he said. “Who has money? These are boomers, not Gen X or Gen Z. I do not know in the next 10-12 years what the life insurance sector will face as far as insurance is concerned.

“The industry is transforming.”

Insurance impacts economy
Matt Barton is CEO of the Missouri Association of Insurance Agents, the trade association for independent insurance agents who do not write policies with State Farm.

Barton said State Farm has the highest market share of home and auto policies in Missouri. He added that independent agents have access to multiple carriers.

“Over the past year or so, we’ve definitely seen higher claims with a number of insurance companies, and that has had a substantial effect on them,” he said. “Some have even exited the market altogether, and others have gone into receivership. Some have cut back on the states in which they write.”

Almost across the board, insurance rates are rising, no matter the carrier, he said, and that affects all businesses and individuals.

“Higher premiums have an effect on the overall economy,” he said. “Most people don’t realize the incredible effect, or how reliant the economy is upon insurance.”

Higher claims affect premiums charged by carriers, he said, and that causes downward pressure on consumers and businesses alike.

“Whenever businesses are charged higher premiums, they can either absorb them or pass them along to consumers,” he said.

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