Moody's Cuts State Farm Ratings

Moody's Cuts State Farm Ratings

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

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

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

Commenting on its ratings action, Moody's noted State Farm group's "weak operating performance and materially reduced capital base," as the Bloomington, Ill.-based insurer struggled with three years of operating losses and two years of stock market declines.

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

State Farm's status as a mutual insurer has also been a problem when it comes to raising capital, according to Moody's: "As a mutual insurer, State Farm has more modest profit targets than most of its peers, which supports its conservative financial and customer-focused profile, but limits its ability to rebuild capital."

But the rating firm said that looking ahead, State Farm may finally be getting out of its fiscal doldrums during the rest of 2003 and beyond. "Moody's believes that State Farm has taken steps to reduce its underwriting losses, and these actions are beginning to result in improved operating results in 2003. These steps include rate increases, restrictions on new business, and refinement of the company's risk selection and pricing approach."

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