A.M. Best Downgrades State Farm Indemnity, Places Under Review.

Business Editors

OLDWICK, N.J.--(BUSINESS WIRE)--June 13, 2001

A.M. Best Co. has downgraded the financial strength rating of State Farm Indemnity Company, Wayne, NJ, to B+ (Very Good) from A- (Excellent). In addition, the rating has been placed under review with developing implications.

This rating action follows the June 12, 2001 announcement by State Farm Indemnity that it intends to stop writing automobile business in New Jersey as well as the continued deterioration in the company's overall operating performance and further erosion of its capital base. Since 1998, the company's results have deteriorated significantly, as evidenced by substantial underwriting losses. These poor results have been driven by rate inadequacy as well as the company's unfavorable loss experience. While its geographic business concentration in New Jersey presents a challenging regulatory environment, particularly given the enactment of the Automobile Insurance Cost Reduction Act of 1998 (AICRA), the company's overall results are significantly worse than many of its larger peers. Performance was particularly poor in 2000 as State Farm Indemnity recorded a nearly 32% drop in surplus, due mostly to unfavorable loss experience, with an overall combined ratio of 133. As a result of this decline, as well as an additional 6% drop in the first quarter of 2001, the company's net written premiums to surplus is more than 3.1, with net leverage including liabilities at nearly 10-to-1. Although granted exemption from the state's "take-all comers" provision in April, leverage is expected to rise further as the company's unfavorable operating trends continue.

Despite the weakened capital position, including lack of current capital support from the parent, the secure rating is based on A.M. Best's expectation that the company will continue to have funds sufficient to pay its anticipated claims going forward. Further, the secure rating reflects the parent company's long-standing commitment to policyholders derived from its mutual ownership structure.

State Farm Indemnity's rating will remain under review pending resolution of its withdrawal plan with the New Jersey Department of Banking and Insurance.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.