A.M. Best Upgrades Rating for State Farm Indemnity Co.

A.M. Best Co. has upgraded the financial strength rating to B+ (Very Good) from B- (Fair) of State Farm Indemnity Company (Parsippany, N.J.). The outlook for the rating remains positive.

The upgrade and positive rating outlook reflect the company’s enhanced capital position and improved operating performance trends in recent years. The company’s favorable capital position is attributable to its reduced underwriting leverage position, conservative investment portfolio, as well as generally favorable liquidity and cash flow positions. Recent performance improvement was driven by its seasoned book of business, enhanced rate adequacy and the favorable development of prior year losses.

In the years prior to 2002, State Farm Indemnity’s capital position exhibited significant volatility with declines in surplus driven almost entirely by underwriting losses, which resulted in elevated underwriting leverage measures. This poor loss experience was partially attributed to the company’s previous tier rating structure and the challenging pricing environment at the time.

As a result of State Farm’s brand name recognition and New Jersey’s take-all-comers environment, State Farm Indemnity recognized a substantial increase in exposures. Given the increasing loss costs at the time and the generally unseasoned nature of a large portion of its book of business, the company’s experience deteriorated substantially.

A.M. Best anticipates continued profitability in State Farm Indemnity’s operating results due to the ongoing combination of improved rate adequacy, a more seasoned book of business and better risk segmentation.