Financial

2006 Financial Results

Property & Casualty

(Results include auto, fire, health and miscellaneous reinsurance.)

2006 underwriting results for our Property/Casualty (P/C) insurance affiliates improved significantly compared to 2005, most notably due to the reduction in hurricane losses which impacted 2005 results.

In 2006, the P/C affiliates (combined) reported an underwriting gain of $3 billion compared to an underwriting loss of $779 million in 2005.  The combined ratio for 2006 was 93.8, representing a 7.8 percentage point improvement from the 2005 combined ratio of 101.6. The P/C operations also produced positive cash flow, which led to a 9.4 percent ($5 billion) increase in the combined P/C long-term bond portfolio. 

Total P/C expenses in 2006 increased $832 million from 2005 (5 percent). The increase in expenses combined with an increase of 1.7 percent in average policies in force resulted in a 3.3 percent increase in expense per policy. Increased agency- related expenses (commissions, agent incentives and post-career expenses, and National Convention) were partially offset by a significant reduction in fire affiliate catastrophe claim handling expenses. Claim handling expenses were higher in 2005 due to hurricane activity.  

Voluntary auto policies in force increased during 2006.  However, the result was below the 2005 gain and was also below our planned growth. A lag in production was the key reason we fell below our growth targets.  However, retention (as measured by our lapse/cancellation ratio) did improve compared to 2005. Home-
owners and business insurance policies in force also increased during 2006, and growth in both lines of business exceeded our targets. 

The combined underwriting gain in 2006 was $3 billion on earned premium of $48 billion. These results, combined with net investment income and other income of $3 billion, resulted in a pretax operating profit of $6 billion compared with a profit of $3.5 billion in 2005. Pre-tax results were reduced in 2006 by policyholder dividends declared during the year by the Board of Directors for State Farm Mutual ($1.25 billion) and State Farm Indemnity ($130 million). 

Auto Lines of Business

The auto business written by State Farm Mutual, State Farm Indemnity, State Farm Guaranty, and State Farm Texas County Mutual produced an underwriting gain of $945 million (3.1 percent of earned premium) compared with a $585 million (1.9 percent of earned premium) gain in 2005. The auto business generated net earned premium of $30.7 billion, an increase of 0.2 percent compared to 2005.  The slight increase occurred despite rate activity which reduced 2006 earned premium by $916 million. Growth in auto policies offset the decline due to rate reductions. 

The loss ratio for the auto lines of business was 60.8 percent in 2006 compared to 63.6 percent in 2005, an improvement of 2.8 percentage points. Auto losses decreased $834 million (4.3 percent) compared to 2005.  Auto line catastrophe losses decreased by $601 million (59.5 percent), as 2005 results were significantly impacted by auto line losses resulting from hurricanes.  In addition, a continued moderation in auto claim frequency contributed to a reduction of $233 million (1.3 percent) in auto line non-catastrophe losses. 

Fire Lines of Business

(Homeowners, Business Insurance, Other) – State Farm Fire and Casualty, State Farm Lloyds, State Farm General and State Farm Florida reported a combined underwriting gain of $1.2 billion (8.1 percent of earned premium) in 2006 compared to a gain of $1.4 billion (9.5 percent of earned premium) in 2005.  The underwriting gain declined by 12 percent between years mainly due to an increase in losses.

The companies reported net earned premium in 2006 of $15.5 billion, 3.6 percent more than 2005. The premium gains were impacted primarily by growth.  Total incurred losses for 2006 increased $442 million (5.7 percent) compared to 2005.  The increase was primarily due to an increase in the severity of non-catastrophe losses. Catastrophe losses for the fire affiliates decreased slightly between years. Although 2005 results were impacted by hurricane losses, on a net (after reinsurance) basis, the financial impact to the fire affiliates was reduced. In 2006, more catastrophe events occurred, but did not result in recovery under catastrophe reinsurance contracts. As a result, net catastrophe losses did not change significantly between years.

Auto Underwriting Ratios and Underwriting Gain (Loss)

Fire Underwriting Ratios and Underwriting Gain (Loss)

“2006 was a profitable year, but our evaluation of financial success is defined by our accomplishments over a longer period of time than one year. Given the potential for volatility in the insurance business, we must avoid the temptation of attributing too much significance to short-term financial results. Our customers expect us to maintain the financial strength necessary to deliver on the promises we make to them over a long period of time.”
Michael Tipsord – Vice Chairman, Treasurer and Chief Financial Officer

Bank

State Farm Bank®, F.S.B. reported its third consecutive annual after-tax profit in 2006. The Bank’s after-tax net income was $24 million in 2006, compared with $22 million in 2005. The Bank continued to grow and deepen the relationships with State Farm® customers. The number of accounts increased by nearly 229,000, and State Farm Bank ended the year with more than 1.6 million accounts. Vehicle lending through State Farm Bank continued to be strong in 2006 with over $2.0 billion of new vehicle loan originations. Total assets for the Bank increased to $13.5 billion in 2006 compared to $12.2 billion at the end of 2005. 

Health

The individual Health insurance operations reported a $32 million underwriting loss during 2006 compared to a $16 million underwriting loss in 2005. Net written premium was $753 million in 2006, down one percent from the previous year. Application production (excluding Humana® alliance) was below plan, decreasing 2 percent from the prior year. The number of health policies in force was essentially unchanged from the prior year, although that number grew by nearly 7,000 when excluding the hospital-surgical line (a closed block of business).

Life

State Farm Life Insurance Company and State Farm Life and Accident Assurance Company added 103,000 policies and $42 billion of total insurance volume during the year, bringing the Companies’ year-end 2006 policies in force to 7.6 million and insurance in force to $651 billion. In addition, in 2006, the life affiliates reported a new calendar year record of $108.9 billion of ordinary life application volume written, surpassing the old record set in 2001 by 4.6 percent. 

Net income for the life affiliates was $408 million in 2006, compared to $333 million in 2005. The life affiliates ended the year with a combined net worth of $5.3 billion.

Mutual Funds

State Farm’s retail mutual fund operation ended the year with $3.9 billion in assets under management (excluding 529 plans). This represents an increase of nearly $1.1 billion from a year earlier and was the largest one-year increase since inception. The average account size (excluding 529 plans) as of December 31, 2006 was $11,470. State Farm VP Management Corp. and State Farm Investment Management Corp. reported a combined after-tax net loss of $14 million in 2006, a $4 million improvement from 2005.