S&P; Downgrades Farmers Insurance Group’s Ratings

Steep losses in homeowners insurance led a major rating company to downgrade Farmers Insurance Group on Tuesday and signaled more rate hikes ahead for policyholders nationwide.

Standard & Poor’s cut Farmers’ credit and financial strength ratings by two notches, to A from AA-, after two years of rising claims costs eroded the Los Angeles-based insurer’s capital reserves, said S&P; analyst Grace Osborne.

The action was the second time this year that a major insurer faced a downgrade. Last month, A.M. Best cut its financial strength rating of State Farm’s California subsidiary, State Farm General Insurance Co., one notch from A- to B+ because of similar losses in the insurer’s homeowners line.

Such downgrades make it more expensive for companies to borrow money and are considered a blow to insurers’ reputations.

The rating actions are expected to lead to more rate hikes for U.S. homeowners, whose premiums started rising in 2001 after being stable for several years. In California, State Farm has asked for two 6.9% increases, Allstate applied for a 22.3% increase and Farmers has requested five rate hikes, ranging from 5% to 6.9% each.

“Homeowners insurance has been problematic, and that is why [insurers] have been doing a lot of these rate increases,” Osborne said. “All these companies will continue to look at their results in individual states and see if rates need to be adjusted further.”

Farmers’ pretax losses jumped in 2000 to $865.5 million from $103.4 million in the previous year, and 2001 probably was worse, Osborne said. Farmers, which is the nation’s third-largest home and auto insurer, hasn’t released its financial results for last year, but the insurer said it lost $400 million in Texas alone because of a huge increase in mold-related damage claims.

Farmers and other insurers also have been hurt by storm-related losses in the Midwest and an increase in the frequency and severity of claims nationwide, analysts said.

Farmers officials said Tuesday the company had already taken significant steps to reverse the losses, such as raising rates, restricting coverage, spreading risk through reinsurance and accepting a $500-million infusion from its parent company, Zurich Financial Services Group.

Those actions convinced S&P; that the insurer’s outlook is stable and that its operating results probably will improve this year, Osborne said.

Some of the changes by Farmers and other insurers have prompted a backlash, however. A Santa Monica-based consumer group, the Foundation for Taxpayer and Consumer Rights, accused insurers of gouging consumers and asked California Insurance Commissioner Harry Low not to allow further rate increases. All rate changes in California must be approved by regulators.

In Texas, by contrast, insurers face few restrictions on raising rates, and some companies have boosted premiums by as much as 200% after mold-related claims spiraled last year. Thousands of homeowners have had their policies canceled, and insurers have rewritten coverage to exclude most water-related damage.

The changes have been so sudden and severe that Gov. Rick Perry ordered the state’s attorney general last week to investigate the business practices of Farmers, State Farm and Allstate, saying the insurance market in Texas had suffered a “breakdown.”

Mold-related claims also are on the rise in California, although the problem is not yet as severe as in Texas, analysts said.