State Farm loses top credit ratin from S&P

Friday, May 17, 2002

AP Business WriterCHICAGO (AP) -- State Farm, the nation's largest insurance company, had its triple-A rating for credit and financial strength stripped Friday by Standard & Poor's because of its record losses last year.

An analyst said the downgrade will increase pressure on State Farm and the insurance industry to further raise auto and homeowners premiums in order to boost slumping finances.

The New York-based credit-assessment agency lowered its rating for Bloomington, Ill.-based State Farm by one notch to double-A plus, pointing to a $9.3 billion loss from its core property-casualty businesses in 2001 that was caused by a number of factors weighing on the industry.

It said parent firm State Farm Mutual Automobile Insurance Co. retains "great strengths," including "an excellent reputation in all major lines of business," and has taken actions that could narrow underwriting and operating losses this year and produce an operating profit in 2003.

Nonetheless, this year's losses "will likely be significant."

State Farm had a net loss last year of $5 billion, the highest in its 80-year history, hit by mounting claims and drastically reduced capital gains.

A spokesman for the insurer, Phil Supple, said the downgrade was disappointing because Standard & Poor's focused on the "short-term negative results." He noted that two other agencies, Moody's and AM Best, gave State Farm their highest ratings recently despite last year's results.

"We feel the results don't cloud the fact that State Farm Mutual remains a very strong company financially," he said. "State Farm's long-term ability to take care of policyholders continues to be strong."

The insurer has a net worth of $38 billion, twice that of a decade ago, and is taking steps to improve it, he said.

S&P blamed State Farm's recent losses on aggressive nationwide rate-cutting, high loss costs resulting in part from rapidly increasing medical costs, an unusually bad year for property losses from weather catastrophes and other reasons.

Much of the insurance industry has been raising rates since mid-2001 to compensate for those factors and a steep drop in investment income.

"The downgrade puts pressure on State Farm to return to profitability, and that needs to be done through effective pricing, which means rating rates on auto and homeowners," said analyst Nancy Benacci of Cleveland-based McDonald Investments.

"With the largest auto and home insurer having been pretty aggressive on pricing -- cutting rates up until the last nine months -- this will now allow other insurers to raise rates" even more, she said.

Supple declined to comment on the possibility of rate increases, saying only: "Our general strategy is to seek adequate price for our product."

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