Moody's Cuts State Farm Ratings

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NU Online News Service, July 25, 2:46 p.m.EDT?Moody's Investors Service has lowered financialstrength ratings for three members of the State Farm insurancegroup: State Farm Mutual Automobile Insurance Company, State FarmLife Insurance Company, and State Farm Life and Accident AssuranceCompany.

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The New York-based ratings agency said lowering of the ratingsto "Aa1" from the highest investment grade of "Aaa" was prompted by"years of operating losses at the insurance group."

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Moody's added that the ratings reduction concludes a review thatstarted last March, and the ratings outlook is now "stable."

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Commenting on its ratings action, Moody's noted State Farmgroup's "weak operating performance and materially reduced capitalbase," as the Bloomington, Ill.-based insurer struggled with threeyears of operating losses and two years of stock marketdeclines.

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State Farm group's overall net worth has taken a dive in thepast few years as well, falling from $45.8 billion in 1999 to $31.8billion by the end of last year. In Moody's view, "the markedreduction in statutory surplus has placed pressure on the group'scapital adequacy."

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State Farm's status as a mutual insurer has also been a problemwhen it comes to raising capital, according to Moody's: "As amutual insurer, State Farm has more modest profit targets than mostof its peers, which supports its conservative financial andcustomer-focused profile, but limits its ability to rebuildcapital."

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But the rating firm said that looking ahead, State Farm mayfinally be getting out of its fiscal doldrums during the rest of2003 and beyond. "Moody's believes that State Farm has taken stepsto reduce its underwriting losses, and these actions are beginningto result in improved operating results in 2003. These stepsinclude rate increases, restrictions on new business, andrefinement of the company's risk selection and pricingapproach."

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Furthermore, State Farm continues to have a "dominant position"in the U.S. personal lines market, with a very strong franchise,Moody's added.

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