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Thursday, 05 April 2007 15:51

State Farm announces 1.25 billion dollar mutual auto policyholder dividend

 State Farm Mutual Automobile Insurance Company announced in April it will pay $1.25 billion in dividends to its mutual auto insurance policyholders in 46 states, the District of Columbia and the Canadian province of New Brunswick.

 The dividends are calculated by percentage of prior term semi-annual premium. Oklahoma will receive 12.5 percent, which amounts to $21.4 million, New Mexico is calculated at 13.7 percent to a total of $13 million. Texas dividends, 7.9 percent at $9.1 million, are subject to approval by the state Department of Insurance.
 The record-breaking payment of dividends, approved by the State Farm Mutual board of directors, eclipses the previous high of just over $1 billion in June, 2000.
 The better-than-expected auto results combined with a $4.1 billion reduction in catastrophe losses in 2006 resulted in an increase in State Farm’s companywide net income – an increase that was almost identical to the previous year’s decline. In other words, net income in 2006 was almost identical to that of 2004. The company is reporting an after-tax net income from all sources of $5.32 billion, compared with $5.31 billion in net income reported in 2004 (two years ago). State Farm’s net income in the hurricane-laden year of 2005 was $3.24 billion. The three consecutive years of profit follow a three-year period (2001-2003) during which State Farm lost nearly $5 billion.
 “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,” said Michael Tipsord, Vice Chairman, Treasurer and Chief Financial Officer. “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.”
 The company is reporting a property-casualty (P-C) underwriting gain in 2006 of $3.0 billion. It is only the third time in the last ten years a P-C underwriting gain has been achieved. The other two years in which that happened are 2004 and 1997.
 The combined net worth of the State Farm companies increased by $8.0 billion to $58.1 billion. The primary reasons for this improvement were the insurance operating results and the $3.6 billion realized and unrealized gain (net of deferred tax) on P-C companies’ unaffiliated stock portfolios. State Farm’s net worth was also impacted by a pension contribution of $900 million. The P-C companies reported a pretax operating profit of $6.0 billion in 2006, including investment and other income of $3.0 billion and the underwriting gain of $3.0 billion. This compares with a pretax operating profit of $3.5 billion in 2005, which included investment and other income of $4.3 billion and an underwriting loss of $779 million. The combined net worth of the State Farm companies is also affected by the results of operations of non-P-C affiliates, which resulted in a gain for the year of $586 million, primarily driven by results for State Farm Life Insurance Company.
{mospagebreak} Total revenue, which includes premium revenue, earned investment income and realized capital gains (losses), was $60.5 billion for 2006 compared with the 2005 figure of $59.2 billion.
 State Farm’s auto insurance business represents 63 percent of the P-C companies’ combined net written premium. Earned premiums were $30.7 billion, an increase of 0.2 percent from 2005. The incurred claims and loss expenses were $23.1 billion. The underwriting gain was $945 million.
 Comparable 2005 figures were: earned premium, $30.6 billion; incurred claims and loss expenses, $23.8 billion; underwriting gain, $585 million.
 With this latest dividend, State Farm Mutual will have returned $3.8 billion to auto policyholders in four dividends since 1997. In addition, State Farm Mutual reduced its overall auto rate level by 10.2 percent between the beginning of 2004 and the end of 2006. This represents $2.9 billion in implemented auto rate reductions for the company’s customers.
 State Farm does not plan on paying dividends when setting prices, but can pay them to customers at the discretion of its board of directors when financial results are better than anticipated and business conditions permit.
 “As a mutual company, State Farm’s primary obligation is to its policyholders,” said Tipsord. “At State Farm, we work hard to be good stewards for our policyholders and to provide them the very best combination of product, price, service and financial stability. One way we provide value to State Farm Mutual auto policyholders is to pay dividends to them when financial results and business conditions permit. Our customers’ safe driving habits have contributed to our positive underwriting results, and we are delighted to pass along the benefits from those results to them.”
 The size of each policyholder’s dividend will vary significantly by jurisdiction, but the average per insured vehicle will be about $35. Dividend payments will begin in early April and will continue throughout the year. Policyholders can expect to receive their dividend near the time of their policy renewal. Most customers will receive their dividend by check. The dividend for policyholders receiving less than $15 will be credited to their State Farm renewal premium.