Fitch Affirms State Farm's Ratings; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed its '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 Negative.

The Rating Outlook remains Negative reflecting concerns regarding the absence of surplus growth from retained earnings and magnitude of underwriting losses relative to peers. An inability to grow surplus organically and/or underwriting results significantly worse than industry averages would put downward pressure on ratings.

Following a 16% decline in statutory surplus in 2008, State Farm's statutory surplus increased by $3.1 billion or nearly 6% through the first three quarters of 2009 as the recovery in the stock market unwound unrealized losses in unaffiliated common stock investments. State Farm's large investment allocation to common stocks has exposed the company to significant volatility in its surplus account relative to peer companies. However, after stressing the investments portfolio under multiple scenarios, State Farm's capitalization measured by Fitch's proprietary capital model, Prism, remained appropriate for the rating category.

State Farm reported a $3.2 billion underwriting loss in its property/casualty business, translating to a combined ratio of 108% through the first nine months of 2009. Catastrophes year-to-date in 2009 contributed approximately seven percentage points to the combined ratio, which was an improvement from 2008 when catastrophes accounted for over 10 percentage points to a combined ratio of 113%. The personal auto business reported a 106% combined ratio through the first nine months of 2009, which was better than 2008's results, but continues to trail results from peer companies.

At the beginning of 2009, State Farm announced its exit from the Florida homeowners market after it failed to receive rate increases from the Florida Department of Insurance. State Farm continues to work on its exit from Florida homeowners, but still offers auto and other products in the state.

State Farm's ratings continue to be supported by its market-leading position, productive career agency distribution force, strong capital position and diversification provided by its life insurance operations. Weaknesses include a history of below industry average operating results as well as the volatility associated with a large investment allocation to equity securities in the property casualty business.

Life insurance is considered a core line of business for State Farm along with its personal auto and homeowners insurance lines, and consequently, State Farm Life and State Farm Life and Accident Assurance Company are rated on a group basis with State Farm.

Fitch has affirmed the following ratings

State Farm Mutual Automobile Insurance Co.

State Farm Life Insurance Co.

State Farm Life and Accident Assurance Co.

--IFS at 'AA+'; Outlook Negative.

Additional information is available at 'www.fitchratings.com'.

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