State Farm Loses Triple-A S&P Rating

By Daniel Hays

NU Online News Service, May 17, 3:31 p.m. EST? Standard & Poor's in New York said today that multi-billion dollar losses in 2001 prompted it to downgrade the ratings for most of State Farm's core operating units to double-'A'-plus from triple-'A'.

S&P had placed those ratings on CreditWatch in March after the Bloomington, Ill.-based insurer reported a $5.0 billion after-tax net loss for 2001.

Reacting to the downgrade, Phil Supple, a State Farm spokesperson for the Bloomington, Ill.-based firm said, "We acknowledge 2001 was a disappointing year, but we're addressing the causes for those losses and we don't think those financial results cloud the fact that State Farm Mutual remains very strong financially."

He noted that in March, A.M. Best Company in Oldwick, N.J. and Moody's Investors Services in New York had each affirmed their highest ratings for the company.

"We're taking the necessary steps to reverse the negative financial trends," he said.

S&P also said today that it will keep its rating of keep State Farm Lloyds' rating at single-'A.' S&P lowered the financial strength rating for State Farm Lloyds in January, mainly because of extremely large losses the company incurred for mold damage to homes it insures in Texas.

Don Watson, director of S&P's insurance ratings group, said that State Farm Lloyds' rating was not changed again because there appeared to be "no ongoing adverse development" from mold claims.

He noted also that the parent had contributed additional monies to assure the financial solidity of State Farm Lloyds and that the "rating at A level is still fine."

Charles Titterton, an S&P analyst, said, "These rating actions are the result of a very large collective operating loss from State Farm's core property-casualty companies and SF Lloyds."

The loss, which includes a $9.3 billion property-casualty underwriting loss for 2001, is the result of aggressive nationwide rate setting; high loss costs, including reserve strengthening driven by rapidly increasing medical costs; a very severe year for property losses from natural events; and a number of regional and local factors, the analysts said.

S&P said it considers State Farm Lloyds strategically important to State Farm Mutual Automobile Insurance Co. (SFMA), the group's parent and the largest insurance company in the U.S.

The actions on two State Farm life insurance companies, which have generated strong earnings, stem from Standard & Poor's application of its rating methodology, it said.

The companies are considered core to SFMA, S&P said, because of common ownership, common distribution, common marketing (they are one part of the familiar Auto/Fire/Life triad on State Farm's logo), and Standard & Poor's view that they are highly unlikely to be severed from the group. S&P normally accords all core operating units the same rating.

The rating firm's analysis noted that State Farm retains extremely strong capital, unsurpassed spread of risk for an insurer, an extremely large market position in personal lines insurance, a very substantial and complementary position in life insurance, and an excellent reputation in all major lines of business.

State Farm has taken a number of actions that Standard & Poor's said it believes could significantly narrow the underwriting and operating losses in 2002 and produce an operating profit in 2003. Nevertheless it found "the underwriting and operating losses in 2002 will likely be significant."

The size of losses depends on variables such as customer acceptance of significant rate increases and the degree of reduction of loss ratios, particularly in coverages like mold damage and slab foundation cracking in Texas and automobile personal injury protection in the Northeast, S&P said.

A complete list of the ratings is available to subscribers at www.ratingsdirect.com and on Standard & Poor's public Web site at www.standardandpoors.com under Ratings Actions/Newly Released Ratings.