A.M. Best Affirms Group Ratings of State Farm with a Negative Outlook and Lowers Rating of State Farm Fire and Casualty

Business Wire, Feb 28, 2003

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--Feb. 28, 2003

A.M. Best Co. has affirmed the financial strength ratings of the property/casualty and life affiliates of the State Farm Group (Bloomington, IL), as detailed below, and lowered the financial strength rating to A (Superior) from A (Superior) of State Farm Fire and Casualty Company (Bloomington, IL).

In addition, negative rating outlooks have been assigned as indicated.

The lowering of State Farm Fire and Casualty Company, a wholly-owned subsidiary of State Farm Mutual Automobile Insurance Company (State Farm Mutual) and dedicated property writer, reflects continued deterioration in its stand-alone capitalization, lackluster operating performance trends and substantial common stock investment leverage, representing more than 100% of policyholders' surplus. For the two year period ending December of 2002, State Farm Fire and Casualty Company's surplus declined by approximately 40% due to the combination of poor underwriting experience and losses in the equity portfolio. When combined with the recent premium growth associated with the company's renewed focus on underwriting profitability and rate adequacy, premium leverage increased considerably. With growth in written premium exceeding surplus gains, it is anticipated that premium leverage will remain high over the near-term.

While the company is a wholly-owned subsidiary of State Farm Mutual and benefits from the implicit support of its parent, formal capital support on an operating basis has been limited. Prior to this rating change, the company was afforded the rating of the State Farm Group, reflecting its core status and favorable stand-alone capitalization. While still core to the overall strategy of State Farm, A.M. Best no longer views the capitalization of State Farm Fire and Casualty Company as supportive of a group rating.

The negative outlook for State Farm Fire and Casualty Company reflects the uncertainties associated with the sustainability of performance improvement initiatives, anticipation of continued elevated premium leverage and on-going exposure to equity market volatility.

The affirmation of the A rating of the State Farm Group, led by State Farm Mutual, reflects its strong capitalization, well-recognized franchise and dominant market presence. Despite considerable declines in surplus over the last three years, State Farm continues to maintain a significant capital base and relatively modest underwriting leverage position. While operating results over the last several years have been poor, State Farm has taken corrective actions, particularly in 2002, including a renewed focus on underwriting profitability and improved rate adequacy. As a result, year-end 2002 results reflect a nearly ten point improvement in the combined ratio. The State Farm life affiliates remain very well capitalized with excellent liquidity and continue to report consistent operating gains.

Although improvement was noted in 2002, the group's combined ratio remains above those of its similarly rated peers. Unfavorable underwriting experience, combined with unrealized capital losses on the stock portfolio, has driven sizeable surplus declines over the last several years. Although the common stock portfolio is well diversified and represents less than half of the overall invested asset base, common stock leverage as a percentage of surplus is high at more than 80%. Further, continued improvement in results will be contingent upon normalized catastrophe activity over the intermediate term, along with stabilization of the equity markets.

Although the group's risk adjusted capitalization and strong business profile continue to support the current rating, A.M. Best views the rating outlook as negative given the uncertainties associated with State Farm's underwriting performance improvement initiatives, sizeable exposure to equity investments and potential increases in underwriting leverage.

The financial strength rating of A (Superior) for the following State Farm property/casualty affiliates is affirmed with a negative 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 financial strength rating for State Farm Fire and Casualty Company has been lowered to A (Superior) from A (Superior) with a negative outlook.

The financial strength rating of A- (Excellent) for State Farm Florida Insurance Company has been affirmed with a stable outlook.

The financial strength ratings of B (Very Good) for the following State Farm property/casualty affiliates have been affirmed with a negative outlook:

-- State Farm General Insurance Company

-- State Farm Lloyds

The financial strength rating of B- (Fair) for State Farm Indemnity Company has been affirmed with a positive outlook.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's web site at www.ambest.com.