Fitch Rating Goes Negative On State Farm

The change was made for State Farm Mutual Automobile Insurance Company, State Farm Life Insurance Company, and State Farm Life and Accident Assurance Company, collectively referred to as State Farm Life. All are currently given Fitch's highest strength level, "AAA." The next level below that is "AA-plus," Mr. Pawlowski said.

A representative for State Farm, Dick Luedke, said the company has "taken, and will continue to take, the steps necessary to reverse our negative financial trends."

He said in a "challenging time" for the entire property-casualty industry, "State Farm financial strength is down, and our recent financial results have not been good," but he noted that "we are still among the financially strongest companies in the industry."

Fitch said its move was prompted by concern that State Farm's prospective underwriting results "will not improve to a level commensurate with the company's current rating."

Better-than-average underwriting profitability is critical for highly rated, short-tail personal line writers in the current low-interest-rate and uncertain equity market environment, Fitch said.

The rating firm noted that equity market declines throughout 2002 have had a significant adverse impact on State Farm's surplus.

Fitch explained that State Farm Life's rating outlook is impacted because it is using a group rating approach that links it to State Farm. State Farm Life's relatively modest size compared to the entire State Farm organization, common senior management, brand identification and career agency distribution make it sensitive to changes in State Farm's rating, Fitch said.

Although State Farm's 2002 underwriting results have improved relative to 2001′s poor performance, Fitch said the insurer's combined ratio of 116.1 through June 2002 falls outside of Fitch's expectations.

Fitch said that State Farm has taken significant steps to improve its underwriting results, such as obtaining rate increases and limiting growth, but it believes that further improvements are necessary.

State Farm's large market share and size will make it difficult for the company to produce better-than industry average results going forward, Fitch commented.

Fitch noted that State Farm's surplus declined by $3.6 billion through June 2002, and $5.2 billion in 2001 related to net unrealized capital losses, largely due to declines in the value of the company's unaffiliated common stock investment portfolio.

Given the approximate 17 percent decline in the S&P 500 Index in the third quarter of 2002, Fitch said it anticipates that State Farm's common stock portfolio will experience further declines for the third quarter.

While Fitch said it believes that State Farm has a strong surplus position, it found the impact of these declines on surplus is material.

State Farm still has superior market penetration and a very strong competitive position, bolstered by the company's career agency distribution force, Fitch said.