Fitch Affirms State Farm’s ‘AA+ Ratings; Stable Outlook

June 4, 2008

Fitch Ratings has affirmed its ‘AA+’ Insurer Financial Strength (IFS) ratings on State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company and State Farm Life and Accident Assurance Company. The outlook for all of the ratings is stable.

“State Farm’s ratings continue to be supported by its highly productive career agency distribution force, strong capital position and diversification provided by its life insurance operations and national scope,” Fitch noted. “Weaknesses include a history of below industry average operating results in both property/casualty and life insurance as well as the risks associated with a large investment allocation to equity securities in the property casualty business.”

Fitch also indicated that “life insurance is considered a core line of business for State Farm along with its personal auto and homeowners insurance lines, and consequently, State Farm Life and State Farm Life and Accident Assurance Company are rated on a group basis with State Farm.

“State Farm’s 2007 operating results showed an underwriting gain, which is consistent with most personal lines writers given a second consecutive year with minimal catastrophe losses. The $621 million gain was down considerably relative to 2006’s $3 billion underwriting gain.

“In spite of State Farm reporting underwriting gains in three out of the last four years, profitability has been a weakness. Over a longer time horizon, State Farm reported only four underwriting gains in the last 11 years.”

The rating agency cited the “relatively benign catastrophe years in 2006 and 2007,” as having allowed State Farm’s statutory surplus to grow by $13.5 billion to nearly $64 billion. “Importantly, State Farm’s operating leverage, measure by the ratio between net premium written and policyholders’ surplus, remained comfortably below 1 times (x). This level of operating leverage is favorable relative to peer companies and represents a significant positive trend compared to a recent high-water mark of 1.35x reached in 2002,” said Fitch.

The ratings report also indicated: “Although the company’s surplus already provides a substantial cushion against unexpected losses, State Farm’s purchase of catastrophic reinsurance protection from outside its group of companies somewhat reduces volatility in the capital account.

“The State Farm property and casualty group’s allocation to equity securities was $45 billion or 71 percent of policyholders’ surplus at year-end 2007, remaining a potential source of volatility in the capital account during difficult economic times.”

Source: Fitch Ratings –

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