S&P’s Lowers Majority of State Farm Ratings

Standard & Poor’s has lowered its counterparty credit and financial
strength ratings on all the 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.

Standard & Poor’s also said that it 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 all these companies is stable.

“Through the nine months ended Sept. 30, 2002, State Farm’s
property/casualty operations posted an underwriting loss of $4.9 billion,” Standard & Poor’s credit analyst Charles Titterton said. “Although this result is $1.5 billion better than the loss for the comparable period in 2001, and the year-end 2002 underwriting loss is expected to improve further, the loss exceeds Standard & Poor’s expectations and has prompted the current downgrades.”

Management has increased property/casualty 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. Because of these measures, Standard & Poor’s believes State Farm will achieve much better operating results in 2003, including the possibility of modest operating income.

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, who are considered members of the company, as long as it believes such a policy to be warranted by the financial strength of the organization. Capitalization will remain extremely strong.