A.M. Best Places Ratings for State Farm’s Calif. and Texas Subsidiaries under Review

August 1, 2002

A.M. Best Co. has placed the financial strength ratings of B+ (Very Good) for two separately rated subsidiaries of State Farm Mutual Automobile Insurance Company, State Farm General Insurance Company (Bloomington, Ill.), and State Farm Lloyds (Dallas, Texas), under review with negative implications.

The under review status reflects the weakened stand-alone capitalization of each company, expectation that near term underlying operating results will continue to be unfavorable and uncertainty regarding adequate financial support from the parent.

In the case of State Farm General—the group’s dedicated writer of property coverage in California—the under review status reflects its marginal capitalization and lackluster operating performance. Although State Farm General has increased rates and issued a moratorium on new business, the immediate benefit will be modest given the annual term of the homeowner policy as well as the challenging California regulatory environment.

The secure A.M. Best rating is based on the financial flexibility and implied support of its parent. However, with the continued deterioration in results and increases in State Farm General’s premium leverage position, A.M. Best will require a formal capital commitment as the projected stand-alone capitalization of State Farm General is below the standards of the current rating.

In the case of State Farm Lloyds—the group’s Texas property writer-the under review action reflects extremely poor financial performance and a well-above average premium leverage position. Despite an initial surplus note from the parent of $350 million in Nov. 2001 and a subsequent addition to the note of $300 million in the first quarter of 2002, capitalization remains weak due to ongoing operating losses, impacted significantly by mold related claims.

State Farm Lloyds is currently utilizing Texas’ revised HO-B policy with plans to roll out the State Farm countrywide homeowner policy form in Sept. 2002. Additionally, it has been under a moratorium for new business since Sept. 2001 and has taken considerable rate increases on renewals. While these actions should contribute to stabilization of operating results over the longer term, the near-term impact to capitalization will be minimal.

The parent has displayed its commitment to State Farm Lloyds in the form of the surplus note as well as a capped calendar year stop-loss reinsurance agreement. However, A.M. Best believes the current financial position warrants an additional capital commitment as the operating experience and premium leverage fall below the requirements of a secure rating.

The ratings will remain under review pending further discussions with management and clarification on the parent’s capital allocation strategies. In the absence of capital infusions and a return to more prudent risk-adjusted operating leverage measures, the ratings will be downgraded to the vulnerable rating category.

The financial strength ratings of A++ (Superior) for the following members of the State Farm Group are unaffected:

• State Farm County Mutual Insurance Company of Texas
• State Farm Fire and Casualty Company
• State Farm Mutual Automobile Insurance Company.

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