Fitch Affirms State Farm’s Insurer FSR

Fitch Ratings has affirmed the ‘AA+’ insurer financial strength ratings on State Farm Mutual Automobile Insurance Company (State Farm), State Farm Life Insurance Company (State Farm Life), and State Farm Life and Accident Assurance Company. The Rating Outlook is Stable.

The ratings are supported by State Farm’s top tier franchise, successful career agency distribution, strong capital base, and recently improved underwriting results. Balanced against these strengths are historical underwriting results below peer averages and a large allocation to equity securities that increases the volatility of the capital base. The ratings on State Farm life are based on Fitch’s group rating approach with the State Farm organization, where auto, home, and life insurance are all core products.

State Farm’s underwriting, measured by a combined ratio of 95.6%, was essentially at the industry average during 2004. This result is the product of numerous steps taken to improve its underwriting results, such as implementing rate increases and underwriting revisions, managing its growth and continuing to take steps to control its cost structure.

During 2004, State Farm’s combined ratio was negatively affected by net incurred losses and loss adjustment expenses from four Florida hurricanes amounting to $2.9 billion or approximately 6.1 percentage points on the combined ratio. Also during 2004, State Farm reported a $1.6 billion reserve release that favorably affected the combined ratio by approximately 3.4 percentage points. State Farm reported an underwriting gain of $2 billion in 2004, which was its first underwriting gain since 1997.

State Farm’s unaffiliated equity investments are significant and consequently add considerable volatility to surplus. In recent years, approximately 40% of the combined State Farm property-casualty companies’ investment portfolio, or more than three-quarters of surplus, has been invested in unaffiliated equity investments. This is more than two times the industry average allocation to the asset class. Unrealized losses on equity securities contributed to the $12 billion decline in surplus from 2000-2002, as well as the $14.5 billion increase in surplus over the most recent two years.

Fitch continues to believe that State Farm’s balance sheet remains very strong, characterized by a large liquid investment portfolio, low operating leverage, and strong risk-adjusted capitalization.

Similarly, the strength of State Farm Life’s balance sheet, foundation of stable traditional life insurance reserves, and modest dividend requirements from State Farm continue to reflect favorably on the ratings of the life operation. Finally, the entire State Farm enterprise benefits from the franchise value of the State Farm brand and one of the strongest distribution system in the insurance industry.

The following ratings are affirmed with a Stable Rating Outlook by Fitch:

State Farm Mutual Automobile Insurance Co.

— Insurer financial strength at ‘AA+’.

State Farm Life Insurance Co.

— Insurer financial strength at ‘AA+’.

State Farm Life and Accident Assurance Co.

— Insurer financial strength at ‘AA+’.