Roughly a week after State Farm announced that it would nonrenew tens of thousands of homeowners and commercial apartment policies in California, AM Best has downgraded the company that offered those policies.

Last week, State Farm cited its responsibility to maintain the claim-paying capacity of State Farm General Insurance Company, the State Farm provider of homeowners insurance in California, in support of its decision to go forward with nonrenewals. What State Farm characterized as “tough but necessary decisions” included the nonrenewals of roughly 30,000 homeowners, rental dwelling and other property insurance policies (residential community association and business owners) and withdrawals of some 42,000 commercial apartment policies.

Related article: State Farm Update: More ‘Difficult but Necessary’ Decisions in California

Today, AM Best downgraded the financial strength rating of State Farm General to “B” (fair) from “A” (excellent) and the long-term issuer credit rating to “bb+” (fair) from “a” (excellent).

AM Best said the ratings reflect State Farm General’s balance sheet strength, which AM Best assesses as weak, referring to the first building block on an insurer financial strength rating. Addressing the other rating components, AM Best said it assesses State Farm General’s operation performance as marginal, its business profile as neutral, and enterprise risk management as appropriate.

“The ratings also reflect lift, as defined within Best’s Credit Rating Methodology, from its parent, State Farm Mutual Automobile Insurance Company,” the AM Best announcement says.

The rating agency announcement also highlighted the continued deterioration in State Farm General’s policyholder surplus at Dec. 31, 2023.

AM Best also revised the outlook of the FSR to stable from negative, while the outlook of the long-term ICR is negative.

“The continuation of the negative outlook on the long-term ICR reflects the uncertainty of the company’s ability to stabilize and strengthen its risk-adjusted capitalization given ongoing challenges regarding profitability and internal capital generation, trending adverse reserve development occurring on prior accident years, and the challenging regulatory environment within California’s marketplace that have constrained the ability of State Farm General (as well as its industry peers) to increase premium rates in a timely fashion,” AM Best said.

The rating agency did take note of the “corrective actions” that State Farm management is taking to stabilize its balance sheet strength but said those actions “will need time to gain positive traction over the intermediate term.”