The agent advantage: State Farm gives its agents credit for its success.

State Farm Group, the largest personal lines writer in the country, says its strength comes from its sales force of captive agents.

"Our unique business partnership with our agents has driven the success," said Edward B. Rust Jr., chairman and chief executive officer of State Farm Group. State Farm Mutual Automobile Insurance, the lead company of State Farm Group, is one of only 15 companies to be ranked A+ or higher by A.M. Best Co. for the past half-century. State Farm Mutual Auto underwrites private-passenger auto and small to medium-sized commercial vehicles. State Farm Mutual Auto's major subsidiary, State Farm Fire and Casualty Co., predominantly underwrites homeowners insurance.

Rust said the company's sales force of 17,000 exclusive agents gives State Farm a competitive edge.

"When we look at changes in the marketplace, we look to our agents as our eyes and ears in the field. It's evolved into a relationship that's been very healthy for them and for us in responding to changing conditions. Since the agents are exclusive to State Farm, there is a tighter commitment and engagement than some of our competitors who would use independent agents," Rust said.

Rust acknowledged it hasn't always been easy to be an agent for State Farm. In 2002, State Farm Group took dramatic steps--including refusing to accept new business in some areas--to return to profitability after posting a $5 billion net loss for 2001.

"When we started growing faster than we planned 18 or 24 months ago, we started to make some adjustments ... and we realized our adjustments weren't adequate," Rust said. "In hindsight, we were not aggressive enough." The company began raising rates, and in June 2002, State Farm--which insures one of every five homeowners in the United States--announced plans to stop writing new homeowners business in 17 states and restricted sales in another six states. By August 2002, State Farm had requested that agents in as many as 35 states be more selective when writing business.

"This was very difficult for the agents, but we've worked our way through that," Rust said. The turn-around is bearing fruit, and by June 2003, the company had narrowed its six months loss to $7.1 million down from $413.9 million for the same period a year earlier. The underwriting restrictions have been lifted.

Rust noted during that difficult transition, State Farm agents remained loyal. The attrition rate among agents went unchanged, Rust said.

He also credited State Farm's investment philosophy with boosting the company's surplus. Thirty years ago, State Farm decided to gradually increase its agents holdings.

While the total personal lines industry had an investment leverage--common stocks as a percentage of surplus--of 43.2% at year-end 2002, State Farm bad an investment leverage of 87.8%, according to A.M. Best Co. data.

State Farm Mutual
Automobile Insurance Co.

Ratio Comparison

                   1998     1999     2000     2001     2002

Combined Ratio    106.7    108.3    118.8    119.9    114.8
Opening Ratio      96.7     98.4    109.2    116.6    107.7

Note: Table made from line graph.

Then And Now

                         1953              2002

Assets         $240.2 million     $65.8 billion
Net Premium    $636.6 million     $30.0 billion

Source: A.M. Best Co. Executive Summary
Report; A.M. Best Company Report