S&P Places State Farm Ratings on WatchNeg

March 11, 2002

Standard & Poor’s has placed its triple-‘A’ financial strength ratings on all State Farm’s interactively rated operating companies on CreditWatch with negative implications, primarily because of large losses in the companies’ automobile and homeowners’ multi-peril insurance lines in 2001, particularly in the fourth quarter. State Farm has implemented or is contemplating rate increases within its personal lines sector.

“However,” cautioned Standard & Poor’s director Charles Titterton, “there is the possibility that these rate increases are significantly inadequate to cover underwriting losses for the coming year. This is partially because the rate increases are expected to be implemented gradually due to the group’s mutual ownership structure and customer relationship philosophy.”

The group recorded an after-tax net loss of $5.0 billion in 2001 versus a modest net income in 2000. Its decline in net worth was $5.7 billion, and its property/casualty underwriting loss was $9.3 billion versus $5.6 billion in 2000.

Nationally, these losses were caused by a number of factors, including increased severity in medical payments, automobile physical damage, and both the property and liability components of homeowners’ insurance. In Texas, claims related to mold damage to residences have caused huge losses at State Farm Lloyds, the affiliate writing homeowners’ insurance in that state. Despite the losses, State Farm still has major strengths, including its extremely strong capital adequacy, large market share, and wide spread of risk.

Standard & Poor’s expects to resolve the Credit Watch status of these ratings within 45 days, shortly after meeting with management. Standard & Poor’s believes the most likely resolution will leave the largest rated group members, with the exception of State Farm Lloyds, with ratings in the double-‘A’ range.

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