Best Rates State Farm ‘A++’

June 12, 2007

A.M. Best Co. has affirmed the financial strength ratings (FSR) of “A++” (Superior) and assigned issuer credit ratings (ICR) of “aa+” to State Farm Group and its P/C members and life affiliates. Best also upgraded the FSR to “A-” (Excellent) from “B++” (Good) and assigned an ICR of “a-” to State Farm General Insurance Company, a wholly owned subsidiary of State Farm Mutual Automobile Insurance Company.

In addition Best upgraded the FSR to “B++” (Good) from “B+” (Good) and assigned an ICR of “bbb” to State Farm Mutual’s affiliate, State Farm Lloyds, and an FSR of “A+” (Superior) and an ICR of “aa” to State Farm Life Insurance Company’s wholly owned subsidiary, Bermuda-based State Farm International Life Insurance Company Ltd. (SFI). The outlook for all ratings is stable. Nearly all State Farm companies are headquartered in Bloomington, Ill.

“The ratings reflect State Farm’s superior capitalization, solid operating performance, strength of brand and market presence as the largest property/casualty writer in the United States,” said Best. State Farm “maintains a significant capital base with a correspondingly modest underwriting leverage position despite a substantial decline in surplus in the beginning of the previous five-year period.”

The main causes for the decline, cited by Best, were “generally unfavorable operating results.” As a result the Group’s management has “implemented numerous strategic initiatives to improve results.” These include a “renewed focus on underwriting profitability, managed growth objectives and improved rate adequacy.” The changes have worked, as best noted that “State Farm’s operating performance has significantly improved in recent years.” The Group also benefits from its mutual ownership structure, Best indicated, “which affords significantly less pressure in terms of operating returns compared to its publicly traded peers.”

State Farm profits from “its tremendous brand name recognition, cost-efficient exclusive agents, strong customer loyalty and diversified financial service capabilities,” the report continued. “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.” It operates “dedicated property companies in California, Florida and Texas, three of its highest catastrophe-prone states, which has increased its flexibility to mitigate and manage its exposure to frequent and severe weather-related losses.”

Best said the upgrades for State Farm General and State Farm Lloyds “reflect the companies’ improved risk-adjusted capitalization and operating performance in recent years, as well as the continued financial and operating support of State Farm Mutual.”

However, “State Farm’s unfavorable operating performance in the beginning of the previous five-year period and above average investment leverage due to its sizeable common stock portfolio,” should be considered as offsetting factors.

The unfavorable results in past years were largely the result of “exposure to ongoing weather-related events, rising loss costs in both the personal automobile and homeowner lines of business, as well as State Farm’s previous top-line growth strategy,” Best explained.

The rating agency also noted that “underwriting experience and unfavorable equity market conditions contributed to surplus volatility.” However, Best described State Farm’s common stock portfolio as “well diversified,” representing “less than 40 percent of its overall invested assets. But its common stock holdings as a percentage of surplus are high – approximately 70 percent. Best indicated that while it doesn’t “anticipate State Farm applying a market share-based pricing philosophy, it remains a modest risk factor, given State Farm’s sizeable capital base and more competitive overall market conditions.”

Best described State Farm Life as “the core life insurance affiliate of State Farm and is fully integrated into the Group, which supports the ratings. It provides “a full array of ordinary life insurance and annuity products through the group’s exclusive multi-line career agency system,” Best noted. The only offsetting factor appears to be a “challenge to further penetrate State Farm Group’s vast property/casualty customer base with its life insurance products.”

Bermuda-based SFI acceded to all of State Farm Life’s Canadian insurance business as of Jan. 1, 2007, including assets, liabilities and insurance policies. It has also begun writing new life insurance and annuity business exclusively in Canada. Best said its ratings on SFI are based on its “strong risk-adjusted capitalization, anticipated profitable operating performance and steady net premium growth. The ratings also reflect the implicit support of State Farm Life, as well as its ultimate parent. Offsetting these positive factors is the company’s challenge to grow its businesses in the highly competitive Canadian life insurance marketplace.”

For a complete listing of State Farm Group’s FSRs, ICRs and debt ratings, go to: www.ambest.com/press/061101statefarm.pdf.

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