Canadian Underwriter

State Farm faces rating review on surplus drop

March 6, 2003   by Canadian Underwriter

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The State Farm group, the largest personal lines insurer operating in the U.S., has been placed under review for possible downgrade by rating agency Moody’s Investors Service after the company revealed that its surplus had fallen by US$6.3 billion to US$31.8 billion by the end of December 2002. State Farm group currently holds an “Aaa” rating from Moody’s.
Moody’s says the rating review will affect State Farm Mutual Automobile Insurance Co. and the group’s two life insurance subsidiaries. The rating agency notes that it maintained a negative outlook on these companies since October of last year. State Farm group disclosed a net loss of US$2.8 billion for the 2002 financial year compared with a net loss of US$5 billion for the year prior. Investment write-downs accounted for about 43% of the group’s overall net loss. In turn, State Farm’s property and casualty insurance operations generated an underwriting loss of US$6 billion for 2002. A company statement says that the US$6.3 billion decline in surplus was largely attributed to a US$4.7 billion after-tax realized and unrealized investment loss on the p&c side the operations.
Moody’s says it is concerned with the high level of equity holdings within the State Farm investment portfolio, as well as the company’s ability to react swiftly in correcting underwriting losses. “the review will focus on State Farm’s future operating earnings and cashflow prospects, its ongoing investment strategy, and capital adequacy in light of the significant decline in surplus.”

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