A.M. Best Affirms FSR of State Farm Group

June 15, 2005

A.M. Best Co. has affirmed and upgraded the financial strength ratings of the property/casualty members and life affiliates of the State Farm Group (State Farm).

The ratings reflect State Farm’s superior capitalization, improved operating performance, strength of brand and market presence as the largest property/casualty writer in the United States. State Farm maintains a significant capital base with a corresponding modest underwriting leverage position despite surplus volatility over the last five years.

In response to generally unfavorable operating results, management implemented numerous strategic initiatives to improve results, including a renewed focus on underwriting profitability, managed growth objectives and most importantly, improved rate adequacy.

As a result of these initiatives and firm market conditions, State Farm’s operating performance has significantly improved in recent years as evidenced by an 18-point improvement in the combined ratio and a more than $8 billion swing in pre-tax operating earnings over the past two years.

State Farm also benefits from its mutual ownership structure, which affords significantly less pressure in terms of operating returns compared to its publicly traded peers.

State Farm’s market presence is the result of its tremendous brand name recognition, cost-efficient exclusive agents, strong customer loyalty and diversified financial service capabilities. With State Farm’s ability to provide quality claims handling, bundling of products and services, as well as cost reducing incentives to long-term valued customers, it has created a considerable competitive advantage.

Finally, during the past several years, management implemented numerous loss mitigation initiatives, which included the capitalizing of dedicated property companies in three of its highest catastrophe-prone states. By isolating its California, Florida and Texas property business, State Farm has increased its flexibility to mitigate and manage its exposure to frequent and severe weather-related losses.

Modestly offsetting these positive factors are State Farm’s volatile operating performance trends and above average investment leverage attributable to its sizeable common stock portfolio. Although State Farm can withstand lower operating returns longer than its peers, given its mutual structure, results prior to 2003 were particularly poor with significant underwriting losses posted across all major lines of business.

These results were driven by exposure to ongoing weather-related events, rising loss costs in both the personal automobile and homeowners’ lines of business, as well as State Farm’s previous top-line growth strategy. The underwriting experience, along with unfavorable equity market conditions, contributed to surplus volatility. While State Farm’s common stock portfolio is well diversified and represents less than 40% of its overall invested asset base, common stock holdings as a percentage of surplus are high at approximately 75%.

A.M. Best also recognizes the significant role of the State Farm life affiliates that provide a wide array of ordinary life insurance and annuity products through the group’s exclusive independent agency field force, strong brand name synergy, superior risk-adjusted capitalization on a stand-alone basis and the long-standing record of consistent overall statutory operating gains.

The financial strength ratings of A++ (Superior) of the State Farm Group and its following property/casualty members and life affiliates have been affirmed with a stable outlook:

State Farm Mutual Automobile Insurance Company
State Farm County Mutual Insurance Company of Texas
State Farm Life and Accident Assurance Company
State Farm Life Insurance Company.

The following financial strength ratings have been affirmed and the outlook has been revised to stable from negative:

State Farm Fire and Casualty Company A+ (Superior)
State Farm Lloyds B+ (Very Good) .

The financial strength rating of State Farm General Insurance Company has been upgraded to B++ (Very Good) from B+ (Very Good) with a stable outlook.

The financial strength rating of State Farm Indemnity Company has been upgraded to B++ (Very Good) from B+ (Very Good) with a positive rating outlook.

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