We are State Farm®.

Chairman's Letter

We are a company of many strengths.

From a brand that consumers trust to quality service that ranks among the very best in the industry, an agency force that is second to none, and a solid foundation of financial stability, State Farm is an insurance and financial services leader that responds best when customers need us most. Everything we do as a mutual company begins and ends with people – and our people pride themselves on being there for our customers at some of the most critical intersections in their lives.

We were there for our customers in the aftermath of California wildfires, flooding and tornados in the Midwest, and ice storms in the Pacific Northwest and Canada. But it doesn’t take a major event to cause upheaval; we were also there for those who had kitchen fires or auto accidents. In fact, we kept promises to the more than 12 million customers who filed claims in 2007.

As a company this past year, State Farm net income grew three percent despite a 79 percent drop in the underwriting gain of our property and casualty businesses. We achieved outstanding market growth in a challenging property and casualty insurance environment. We paid auto policyholders $1.3 billion in dividends in 2007. In addition, the Auto lines grew as we provided customers with the fourth straight year of rate reductions and our customer retention levels were very strong. Underwriting results for the Auto lines declined; however, much of the decline was expected due to the magnitude of rate reductions. Fire lines also grew. Customer retention was particularly good among homeowners, but we saw erosion of our underwriting results among our Fire affiliates given the increasing cost of catastrophe reinsurance in the open market as well as deteriorating loss trends. The balance of our business produced a profit and provided expanded opportunities to serve customers’ needs and deepen our relationships with millions of households throughout Canada and the U.S.

We made key investments in our business and in our people as well. We opened up new ways of doing business with our customers while maintaining a commitment to excellent service and financial stability. Online quoting capabilities expanded. Calling after hours to buy auto insurance became a reality in almost every market. And we appointed more new agents than we have in any of the last 20 years.

We did all of that while still maintaining a tradition of quality service, relationships, mutual trust, integrity, and financial strength. We scored far above many competitors on national customer service studies. And our positive auto and homeowners lapse/cancellation ratios demonstrate consumer loyalty admired throughout the industry.

Ultimately, though, we know these results don’t just happen. They are the cumulative impact of the dedicated efforts of agents like Ed Schadler in Kentucky, who knows this business like few do, and Isabel Muñoz, who has special insights into the growing markets of Southern California. They’re in the words of Karman Drake, a claim representative in Texas who excels at providing old-fashioned customer service. They’re the individual actions of underwriters, researchers, safety experts, and associates who care.

Yet simply being a good neighbor in today’s competitive marketplace is not enough. Throughout 2008, we must continue to price effectively, offer products that meet changing needs and responsibly manage the business, especially in catastrophe-prone areas. We will enhance our online capabilities and 24x7 service, in a way that effectively builds on our customer relationships with agents and their need for quick, reliable information. We also are enthusiastically improving our capabilities to meet the unique needs of diverse and growing markets.

Each day there are hundreds of thousands of contacts between State Farm agents and employees with current and prospective customers. Many are face to face. Some are not. But every encounter is a chance for the people we serve to see us at our best, an opportunity for us to demonstrate the true value of State Farm.

Step by step, one contact at a time, individual interactions throughout thousands of communities have brought us to this position of industry leadership. That’s because we understand that intersection of responsibility to our customers, to each other, and to those who follow us. And when they need us, we’re prepared to say: “I’m there.”