State Farm Members Lowered

S&P’s lowered its counterparty credit and financial strength ratings on all members of the State Farm Group of Insurance Companies (State Farm) except State Farm Lloyds to “AA” from “AA+” because of continuing heavy—though much improved—operating losses in State Farm’s automobile and homeowners insurance lines.

S&P’s raised its counterparty credit and financial strength ratings on State Farm Lloyds to “AA-” from “A” because of its greatly improved operating results and the continued support from its parent, State Farm Mutual Automobile Insurance Co. (SFMA). The outlook on these companies is stable.

Losses for the nine months ended Sept. 30, 2002, exceeded expectations, prompting the downgrades. State Farm P/C operations posted an underwriting loss of $4.9 billion for that time period. S&P’s noted that the result is $1.5 billion better than the loss for the comparable period in 2001, and underwriting loss is expected to continue to improve.

Management has increased P/C premium substantially around the country in both of its major lines of business, particularly homeowners insurance; implemented underwriting revisions; managed growth; and continues to take steps to control its cost structure. S&P’s believes State Farm will achieve much better operating results in 2003.

However, earnings will not match those of some competitors, partly because management of this mutual organization will continue pricing to higher loss ratios for the benefit of its policyholders, as long as it believes such a policy to be warranted by the financial strength of the organization. Capitalization will remain extremely strong.

Topics State Farm