State Farm Lloyds Rating Under Review

A.M. Best Co. placed under review the A- (Excellent) financial strength rating of State Farm Lloyds, which is headquartered in Dallas. The action primarily reflects deterioration in the company’s capital position through the first half of 2001 that has resulted in an elevated leverage position.

State Farm Lloyds’ surplus declined by nearly 50 percent during the first six months of the year, due to frequent and severe storm activity and mold related losses throughout the state. The company’s net premium leverage increased substantially as a result. It was at 2.4 to 1 as of June 2001.

State Farm Lloyds continues to record underwriting losses at an extremely high rate, with overall loss ratios for the company reaching the triple digits as of the end of June. A.M. Best expects the poor operating results to extend into the third quarter. They are a continuation of results from 2000, during which the company recorded an approximately 16 percent decline in surplus.

The under review rating reflects the company’s exposure to mold claims in the Texas homeowners market. Although the ultimate impact associated with the mold issue is uncertain, as the market share leader, the increasing frequency of mold related claims could potentially impact the company’s operating performance over the intermediate term.

A.M. Best expects State Farm Lloyd’s ultimate parent, State Farm Mutual Automobile Insurance Company, to help stabilize the currently marginal stand-alone capital position of the Lloyds company. The rating will remain under review pending the implementation of various initiatives, expected clarification of ongoing mold exposure issues in Texas, as well as a fourth quarter meeting with company management.