S&P Lowers State Farm Lloyds

Standard & Poor’s lowered its counterparty credit and financial strength ratings on State Farm Lloyds (SF Lloyds), which writes homeowners insurance in Texas, to “A” from “AAA.” At the same time, S&P revised the CreditWatch status of these ratings to developing from negative.

The rating action stems from the extremely large losses that SF Lloyds has incurred, mainly because of claims for mold damage to houses it insures in Texas; the consequential elimination, before additional support, of more than the surplus it had at the beginning of 2001; and the scope of remedial action taken by State Farm Mutual Automobile Insurance Co. (SFMA; rated “AAA”), the flagship of the State Farm group and the world’s largest personal lines insurer.

Because of the great magnitude of the losses sustained by SF Lloyds and potential future exposure to mold claims, S&P believes the willingness of SFMA to continue its support for the unit at rating levels approaching its own is dependent on a satisfactory regulatory resolution of the terms under which carriers can offer mold coverage in Texas.

SF Lloyds ceased writing new business on Sept. 18, 2001. It has also obtained rate relief. Discussions continue with the Texas Department Of Insurance with respect to the regulation of insurance policies offering mold coverage. SF Lloyds is closely reviewing additional rate needs and reinsurance agreements.

S&P believes that writers of homeowners insurance in Texas— and possibly other states — need to be assured that they can offer their policies without exposure to losses from mold claims approaching the severity experienced by SF Lloyds. Such assurance could be provided by some combination of rate relief, writing mold coverage by endorsement at an additional premium, capping mold coverage or setting a more meaningful standard to determine claim validity.

Topics Texas