The ratings reflect State Farm’s continued superior risk-adjusted capitalization, despite a significant decline in surplus in 2008 of $10.4 billion, due primarily to a $9.2 billion decline in the value of its unaffiliated stock portfolio from unfavorable equity market conditions. The ratings further acknowledge State Farm’s historically solid operating performance and its dominant business profile with strength of brand and market presence as the largest property/casualty writer in the United States. In addition, State Farm continues to maintain a modest underwriting leverage position relative to industry norms. Over the previous five-year period, the group has produced solid overall surplus growth, as a result of generally profitable underwriting results and increasing investment income. The profitable underwriting results were attributable to numerous strategic initiatives implemented by management, including improved rate adequacy and managed growth objectives.
State Farm’s market presence is the result of its tremendous brand name recognition, cost efficient exclusive agents, strong customer loyalty and diversified financial service capabilities. With State Farm’s ability to provide quality claims handling, bundling of products and services, as well as cost reducing incentives to long-term valued customers, it has created a considerable competitive advantage. State Farm has dedicated property/casualty companies in California, Florida and Texas, three of its highest catastrophe-prone states, which has increased its flexibility to mitigate and manage its exposure to frequent and severe weather-related losses.
Partially offsetting these positive rating factors is State Farm’s exposure to equity market fluctuations as well as frequent and severe catastrophe events. This was evident in 2008 with the substantial decline in the value of its unaffiliated stock portfolio. However, State Farm’s unaffiliated common stock portfolio is well diversified and represents approximately 35% of its overall invested assets. State Farm also reported an after-tax net loss of $673 million in 2008, driven by $6.3 billion in catastrophe losses, which included Hurricanes Ike and Gustav, as well as an increased frequency and severity of Midwest storms. Furthermore, State Farm’s underwriting results have recently shown modest deterioration due primarily to higher private passenger automobile loss costs from higher loss severities. However, State Farm has implemented rate adjustments in numerous states to improve overall private passenger automobile rate adequacy.