The Quebec-based financial co-operative, headquartered in Levis near the provincial capital, will operate the business as a separate unit with about 1,700 State Farm employees and 500 agents.
Desjardins expects the deal will close in about a year, in January 2015, after going through the regulatory review process.
The transaction would make it Canada's second-largest provider of property and casualty insurance, which includes home and auto coverage as it would nearly double annual premiums written to $3.9-billion from about $2-billion, Desjardins said in a statement Wednesday.
It also strengthens Desjardins Group's position as the fourth-largest life and health insurer in Canada, it added.
The deal was announced jointly by Desjardins, State Farm's current owner based in Bloomington, Ill., near Chicago and Credit Mutuel, a Paris-based European financial co-operative.
State Farm will invest $450 million in non-voting preferred shares of the Desjardins Group's property and casualty business after the deal closes, while Credit Mutuel will invest $200 million.
Desjardins says it will allocated about $700 million to support growth of the property and casualty insurance business. In addition, its life and health subsidiary, Desjardins Financial Security and other units will allocate $250 million for the State Farm Canada life insurance, mutual fund, lending and living benefits operations.
"This acquisition will allow Desjardins to develop a broader, multi-channel distribution network across the country, while continuing to meet the needs of State Farm's Canadian client base," said Monique Leroux, Desjardins Group's president, CEO and chair of the board.
"At the same time, it will enhance our position in Canada by expanding our customer reach and achieving economies of scale."
State Farm chairman and CEO Edward Rust said the deal will build on the client base that its Canadian employees and agents have built in Ontario, Alberta and New Brunswick.
"This combination creates a leading platform with new opportunities for growth and success for our employees, agents and customers," he said.
"State Farm's financial investment in the newly combined P&C business and licence to use the State Farm brand reflect our confidence in the strength of the combined business going forward."
Michel Lucas, president of Credit Mutuel, said that its investment with long-time partner Desjardins "is part of our policy of diversification, both in France and abroad."
"It also illustrates our interest in actively contributing to the launch of the second-largest P&C insurer in Canada and to its growth in the Canadian market."
Moody's Investors Service maintained its ratings for Desjardins but said the transaction creates risks, mainly because of the increased exposure to the high-risk Ontario personal auto insurance market, which will make its insurance operations "a less predictable source of earnings."
Nearly 90 per cent of State Farm's premiums are based in Ontario while personal auto represents 72 per cent of premiums.
Personal auto insurance in Ontario is higher risk because of regulatory intervention to cut rates and lawsuit trends.
That risk is partially offset by protections built into the transaction's structure, Moody's said.
"The transaction is conservatively structured and financed, mitigating the risk to Desjardins Group," said David Beattie, a Moody's vice-president. "Moreover, we expect Desjardins General Insurance Group's credit profile to strengthen over time as it re-underwrites the acquired portfolio."
Meanwhile, Desjardins' Tier 1 capital ratio will remain above its target of 15 per cent, which is very strong compared with peers.