State Farm Suffers Credit Downgrade, Despite Signs of Financial Comeback

While State Farm Insurance posted several highly visible rate hikes this year — and appears poised to return to profitability with the strongest underwriting performance in two decades — the credit rating firm AM Best has downgraded the insurer’s financial strength outlook.

AM Best, the world’s largest credit-rating agency specializing exclusively in the insurance industry, said the downgrade reflects an “adverse underwriting experience” from increasing losses in both auto and homeowners insurance. It also noted a challenging regulatory environment and frequent hurricanes and wildfires.

The downgrade knocked State Farm, the country’s largest property and casualty insurer by market share, from the very top of AM Best’s rating scale (A++) to A+. The agency also downgraded the company’s long-term issuer credit rating to “aa”, from “aa+” .

While the insurer’s ratings still indicate high financial strength, even a relatively small ratings cut could substantially increase State Farm’s borrowing and reinsurance costs. For example, even a 0.10%–0.25% increase in the cost of borrowing for a company the size of State Farm could cost it billions annually.

And if costs rise for the insurer, it could pass those expenses on to policyholders.

Poor timing for State Farm leadership

The downgrade comes as State Farm is showing positive signs of turning the corner this year. The insurer has weathered five consecutive years of underwriting losses and four straight years of operating losses.

“State Farm is financially strong with the ability to keep our promises to customers,” company spokesman Michael Brower told Insurify. “We have taken significant steps to address underwriting results from prior years and continue to confidently navigate challenging regulatory environments and elevated weather-related losses.”

Indeed, it has been a tough few years for the 103-year-old insurer. Inadequate rates, heavy risk exposure, inflation, and the frequency of major catastrophes all battered State Farm and other property and casualty insurers. In 2024, State Farm’s auto insurance line lost roughly $2.7 billion. The company had an overall underwriting loss of $6.1 billion.

State Farm had previously reported underwriting losses of $14.1 billion in 2023 and $13.2 billion in 2022.

AM Best said the company’s financial results show a reduced ability, or financial cushion, to weather future events such as storms or market volatility compared to its peers.

What’s next: Rate increases to improve financial standing

State Farm Fire & Casualty Co. got six of the highest rate increases among the top 10 homeowners insurers in the third quarter of this year, according to S&P Global Market Intelligence. It saw double-digit rate increases in Hawaii, Iowa, Connecticut, and Colorado, totaling approximately $335 million in premium increases.

Pennsylvania and Oklahoma regulators also approved smaller home insurance rate increases.

State Farm Mutual also raised homeowner rates in Illinois, and California approved an emergency 17% rate increase for State Farm, with another 11% increase request pending.

Meanwhile, State Farm Mutual recorded a $164 million underwriting gain at the end of the third quarter this year, compared with a $3.33 billion loss a year ago. State Farm Fire & Casualty’s underwriting losses decreased substantially, from $4.3 billion to $1.25 billion. And its losses from weather-related catastrophes decreased by more than $1 billion.

But the good news didn’t come in time for AM Best’s review.

Despite the downgrade, “State Farm Group’s business profile is very favorable and reflects its market position as the largest personal lines insurance organization in the United States based on direct premiums written,” AM Best said. “State Farm Group remains the leading provider of private passenger automobile and homeowners’ insurance in the United States.”