State Farm's Net Worth Drops $10.4 Billion; Rust Earns $13.66 Million

By Michelle Koetters
The Daily Pantagraph (Bloomington, IL)
February 28, 2009

BLOOMINGTON -- After a year of stock market volatility, State Farm Insurance Cos.í net worth fell a record $10.4 billion, the company reported Friday. The Bloomington-based insurerís worth dropped about 16.3 percent to $53.3 billion in 2008, down from $63.7 billion in 2007, according to the company.

A $9.2 billion decline in the companyís property-casualty stock portfolio was the primary reason for the loss.

ďObviously, weíre not alone in losing value in an equity portfolio,Ē said spokesman Dick Luedke.

State Farm also calculated an operating loss in 2008, which impacted the insurerís net worth as well, Luedke said. The $2.1 billion operating loss also was the driving force behind the companyís net loss of $542 million in 2008.

Higher-than-expected catastrophe losses were behind State Farmís operating results in 2008, Luedke said.

State Farmís 2008 performance mirrored what Robert Hartwig, president and chief economist of the Insurance Information Institute in Washington, D.C, predicted for the industry.

Hartwig estimated a 16.1 percent decline in net worth for insurance companies. Last year also had the fourth highest level of catastrophe losses, Hartwig said.

State Farm, which has 13,702 employees working in Bloomington, also released annual salary information for its top leader Friday.

Chairman and Chief Executive Officer Ed Rust earned $13.66 million in 2008, up from $11.71 million in 2007. His salary last year included a bonus based on the companyís performance during strong years of 2005 to 2007. He will earn $9.35 million this year, with his bonus based on the companyís performances in 2006 to 2008.

State Farm, whose total employment is 68,800, likes to look at financial results over a longer period of time than one year, Luedke said. The decline in its net worth and its net loss in 2008 follow five consecutive years of gains. State Farmís average annual earnings so far this decade is $1.6 billion.

Even though the companyís net worth dropped last year, the amount still is 68 percent higher than at the end of 2002. State Farmís portfolio loss also did not drop as much as the broader market, the result of a long-term, buy-and-hold investment approach, Luedke said.

ďThat approach has served us well in good economic times and bad economic times,Ē he said.

In 2007, State Farm achieved record earnings of $5.46 billion in the absence of serious hurricanes and other disasters.

But last year, State Farm had more than 1 million catastrophe claims, compared to the 10-year average of 750,000 claims, Luedke said. Catastrophe losses totaled $6.3 billion in 2008, on par with 2005 when hurricanes Katrina, Rita and Wilma wreaked havoc.

The payout in 2008, though, didnít have as much to do with hurricanes as it did with a combination of storms, he said.

Hurricane Ike accounted for $1.4 billion in claims, and Hurricane Gustav totaled $600 million, Luedke said. A lot of smaller weather events, including hail, tornado and ice storms, added up to more than the usual amount, he said.

In an average year, State Farm expects to see about $3 billion in catastrophe losses, Luedke said.

Those catastrophe payments contributed to the underwriting loss in State Farmís property-casualty division, which includes home and auto lines.

State Farmís underwriting loss, which takes into account the premiums State Farm collects from its customers minus its claims and expense payouts, also was $6.3 billion. That loss was partially offset by investment and other income of $4.2 billion.

Those investments included fixed-income assets like bonds that are not as volatile as equities, Luedke said.

Total revenue, which includes premium revenue, earned investment income and realized capital gains or losses, was $61.3 billion last year, compared to $61.6 billion in 2007.

Despite the poor economy, State Farm also experienced some company growth, as auto and home policies both were up about 2 percent, Luedke said.

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