State Farm pullout leaves Florida policyholders scrambling

Jan 27, 2009

Palm Beach Post–January 27, 2009


State Farm Florida, in a move that’s expected to turmoil in the Florida insurance marketplace, State Farm Florida said Tuesday that it is pulling out of the state over the next two years.

The announcement surely caught State Farm’s 933,000 policyholders by surprise, and leave them scrambling to find homeowner’s coverage elsewhere in a market still shell-shocked from the damaging 2004 and 2005 storm seasons.

But State Farm, Florida’s largest private homeowner’s insurer, said it was left with little choice as it was “faced with steeply declining resources to cover future claims and expenses.”

“This is not an action we wanted to take, but one we must take given the realities of the Florida property insurance market,” Jim Thompson, State Farm Florida president, said in a statement. “We regret the impact this will have on our customers, employees and agents in Florida.”

He said customers will start being dropped late this year. They will include not only homeowner’s policyholders, but mobile home, apartment building, rental and condo unit owners, as well. State Farm said the policyholders will lose their coverage as they come up for renewal, over a two-year period.

Florida Insurance Commissioner Kevin McCarty called the State Farm move “disappointing news for Floridians,” but said it did not come as a surprise.

“We have been hearing for months of possible plans to make such a move in Florida,” he said.

Indeed, State Farm had publicly warned that it would be forced to reduce its exposure in the Sunshine State if insurance regulators did not give approval to its plan to raise homeowner rates at least an average of 47 percent. And McCarty, who gave a final rejection to the insurer’s rate hike earlier this month, said State Farm filed a technical document with regulators in December that indicated it might shed more than 650,000 policies.

The fact that State Farm is shedding all of its nearly 1 million policies leaves the rest of market, particularly state-sponsored Citizens Property Insurance Corp., to pick up the slack.

“State Farm’s move shines the light on the problems insurers have in the most hurricane prone place in the world,” said Gary Landry, vice president of the Florida Insurance Council. “The state refuses to give insurers adequate rates.”

While several dozens property insurers have entered the Florida market in the last three years, Landry said those firms would not have the financial capital to take on large groups of new policyholders.

McCarty said he will carefully review State Farm’s intended withdrawal plans to ensure that they are in compliance with Florida law; and we will explore all legal options, as well.

“I will do everything within my power to protect Florida consumers from unnecessary destabilization of the insurance market that this might cause,” he said.

McCarty said the state Office of Insurance Regulation has 90 days to approve State Farm’s plan, and then the insurer must provide 180 days notice to customers before any policies can be dropped.

State Farm, second only to Citizens in homeowners coverage, has 54,000 policyholders in Palm Beach County. It has 5,900 in Martin and 12,700 in St. Lucie.

Despite a 2007 state law pushed by Gov. Charlie Crist prevent insurers from offering only lucrative auto coverage if they offer both auto and homeowners in other states, State Farm says it will continue to offer auto coverage. It is Florida’s largest auto insurer with more than 3 million policies.

That’s because it appears that the law may not apply to State Farm, according to Ed Domansky, a spokesman for the Office of Insurance Regulation.

Domansky said State Farm officials have agreed to move all of its auto insurance business into The State Farm Mutual Automobile Insurance Co., a national company which only sells auto insurance. State Farm Florida is a stand-alone, Florida-only entity created specifically to sell homeowners coverage.

Property insurers who have clashed with Crist, McCarty and state lawmakers over rate increase denials, say State Farm’s decision is another sign of the deeply troubled Florida market.

McCarty said insurance regulators have been working with state Sen. Mike Fasano, R-New Port Richey, to develop legislation that will significantly limit the number of policies a company can shed in a year.

That pending legislation would not affect State Farm’s move, however.

State Farm’s Thompson said the company had become more and more concerned about its ability to cover future claims. During the first three quarters of 2008, a year with relatively modest catastrophe impact and no major hurricanes, State Farm Florida saw its surplus reduced by $201 million, he said.

Year-end 2008 financial statements are not yet available, but State Farm Florida spokesman Chris Neal said it’s losing about $20 million a month.

If losses continued at its current pace, State Farm could have trouble paying its claims by 2011 – even without a major hurricane – according to Robert Hartwig, an economist who serves as president of the New York City-based Insurance Information Institute.

“The Florida insurance market is deeply dysfunctional,” he said. “Insurers have been unable to charge rates with the risk they are assuming.”