Standard and Poor Takes State Farm off Watch, Lowers Ratings

May 20, 2002

Standard & Poor’s has removed from CreditWatch and lowered the counterparty credit and financial strength ratings on State Farm’s core operating units to double-‘A’-plus from triple-‘A’.

Standard & Poor’s also removed from CreditWatch its single-‘A’ counterparty credit and financial strength ratings on State Farm Lloyds. The outlook on all these companies is negative.

“These rating actions are the result of a very large collective operating loss from State Farm’s core property/casualty companies and SF Lloyds,” Standard & Poor’s credit analyst Charles Titterton commented. The loss, which includes a $9.3 billion property/casualty underwriting loss for 2001, is the result of aggressive nationwide rate setting; high loss costs, including reserve strengthening driven by rapidly increasing medical costs; a very severe year for property losses from natural events; and a number of regional and local factors.

Standard & Poor’s considers State Farm Lloyds strategically important to State Farm Mutual Automobile Insurance Co. (SFMA), the group’s parent and the largest insurance company in the U.S.

The actions on the two life insurance companies, which have generated strong earnings, stem from Standard & Poor’s application of its rating methodology. The companies are considered core to SFMA because of common ownership, common distribution, common marketing (they are one part of the familiar Auto/Fire/Life triad on State Farm’s logo), and Standard & Poor’s view that they are highly unlikely to be severed from the group.

State Farm retains great strengths, including extremely strong capital, unsurpassed spread of risk for an insurer, an extremely large market position in personal lines insurance, a very substantial and complementary position in life insurance, and an excellent reputation in all major lines of business.

Standard & Poor’s believes that management has taken a variety of actions that could significantly narrow the underwriting and operating losses in 2002 and produce an operating profit in 2003. Nevertheless, the underwriting and operating losses in 2002 will likely be significant. Their magnitude depends on variables such as customer acceptance of significant rate increases and the degree of reduction of loss ratios, particularly in coverages like mold and slab in Texas and automobile personal injury protection in the Northeast.

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