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California

State Farm Subsidiary's Rating Cut

January 31, 2002|Liz Pulliam Weston

A leading rating agency downgraded State Farm's California operations this week because of significant losses in the insurer's homeowner business.

A.M. Best cut its financial strength rating on State Farm General Insurance Co., a subsidiary of State Farm Mutual Automobile Insurance Co., from A-minus, or "excellent," to B-plus, or "very good." The action follows last week's announcement by rival rating agency Standard & Poor's that it had put California's largest insurer on a credit watch after losses eroded reserves to $390 million from $566million a year ago.

A.M. Best attributed the losses to rising construction costs and State Farm's strategy of trying to win market share with lower-than-average rates.

State Farm's finances will not be directly affected by the downgrade, but the move is considered a blow to the company's reputation.

Analysts have said the rating actions make it more likely that State Farm will ask for rate increases beyond the two 6.9% hikes it already has requested, and that other insurers may follow suit.

Homeowners' insurance premiums have risen significantly in the state. In the last two years, Farmers Insurance Group, the state's second-largest insurer, has asked for five rate increases ranging from 5% to 6.9%, while Allstate Corp. has applied for a 22.3% hike.

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Liz Pulliam Weston

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