State Farm Records Its Largest Loss Ever

State Farm Mutual Automobile Insurance Co. lost a record $5 billion last year as the company was pummeled by huge increases in homeowner and auto claims as well as declines in investment returns, company officials said Friday.

The massive loss on revenue of $40 billion was the insurer’s largest ever and could lead to additional premium increases nationwide, analysts said.

“This does not auger well for other companies in the same marketplace,” said Martin Weiss, chairman of independent rating firm Weiss Ratings Inc. Insurers “are going to be jacking up prices and trying to restore profitability.”

In 2000, State Farm had a profit of $400 million.

Although nearly untouched by the world’s largest insurance disaster--the World Trade Center attacks Sept. 11--State Farm lost $317 million last year to Midwest windstorms, which caused the fifth-largest catastrophe loss in the insurer’s history.

In addition, water damage claims, prompted largely by mold concerns, cost its Texas subsidiary $625 million in capital reserves last year, State Farm spokesman Dick Luedke said. Higher medical, repair and fraud costs also contributed to big increases in the severity of auto claims, he said.

Insurers normally offset underwriting losses by selling profitable investments--usually stocks and bonds purchased with policyholders’ unused premiums. But investment returns plunged last year. Instead of the $3.4 billion in realized capital gains the insurer reported in 2000, Bloomington, Ill.-based State Farm had only $300 million in gains.

State Farm, the nation’s largest auto and homeowner insurer, also suffered from new accounting rules that for the first time forced insurers to recognize losses in investments they had not yet sold. The insurer had $2.8 billion in such unrealized losses.

“You had a convergence of a bad stock market and a negative cycle for the insurance business,” Weiss said. “Instead of one offsetting the other, they had losses on both sides.”

All the red ink caused State Farm’s net worth to drop $5.7 billion to $38 billion. Similar but smaller capital losses at Farmers Insurance Group led Standard & Poor’s to downgrade the Los Angeles-based insurer’s credit rating this month. Meanwhile, A.M. Best cut its financial strength rating of State Farm’s California subsidiary, State Farm General Insurance Co., because of losses in the insurer’s homeowners’ line.

The State Farm parent company probably will face downgrades because of its latest losses, but analysts said the company remains one of the strongest homeowner and auto insurers in the nation.

The losses are “nothing to sneeze at, but they had a sizable cushion to absorb them,” said A.M. Best analyst Anthony Diodato.

That cushion is the envy of State Farm’s competitors, which gripe that the insurer’s reluctance to raise rates in the last year has prevented rivals from increasing theirs as much as they would like. Investor Warren Buffett complained last year about State Farm’s willingness to suffer big losses, saying it put rivals such as Berkshire Hathaway Inc.’s Geico Corp. at a disadvantage.

“State Farm still has a lot of excess capital,” said A.M. Best financial analyst Richard Attanasio. “They can lose more than some of their competitors.”

For example, Allstate Corp., State Farm’s next-largest rival and the nation’s biggest publicly traded insurer, has capital reserves of $13 billion--and considerable pressure from shareholders to maintain profitability, analysts said. By contrast, State Farm is a mutual company owned by its policyholders. Instead of showing a profit, State Farm’s goal typically is to break even, analysts said.

State Farm can’t continue to lose money indefinitely, however.

“State Farm is going to have to raise its rates eventually to recoup, or at least get back to a steady state,” said Don Watson, director of Standard & Poor’s insurance ratings group. If State Farm does increase premiums substantially, Watson predicted, other insurers will follow suit.

“I wouldn’t be surprised to see auto and homeowners’ rates across the board nationally increase by 7% to 9% this year,” Watson said.

State Farm already has received approval for two 6.9% increases in homeowner insurance premiums in California and recently requested an additional 6.7% boost. Allstate is waiting for regulatory approval of a 22.3% homeowners premium increase, while Farmers has requested a series of five increases ranging from 5% to 6.9%.