State Farm Pulling Out of Florida Property Insurance Market

Florida is losing its largest property insurance company.

State Farm Florida Insurance announced today it is beginning the process that will allow it to non-renew policies and halt all sales of homeowners or other property-related policies in the state.

The withdrawal will affect about 1.2 million customers with State Farm homeowners, renters, condominium unit owners, personal liability, boats, personal articles, and business property and liability policies.

It will not affect the availability of auto insurance for about 2.8 million of the insurer’s Florida customers – nor the availability of life insurance, health insurance and other financial services offered by agents of State Farm Mutual and its other affiliates.

Florida law requires that the company submit a withdrawal plan for approval by the Office of Insurance Regulation within the next 90 days, and then give insureds 180 days notice of any non-renewals.

Insurance Commissioner Kevin McCarty, who has regularly sparred with State Farm over rate increase and information requests, said he was not surprised by the move and vowed to closely scrutinize any plan.

The company cited its “substantially weakened financial position,” which it tied to its inability to obtain regulatory approval of property insurance rate increases.

State Farm Florida said that it is submitting a two-year plan that seeks to limit disruptions for customers, and if approved, will allow customers time to find coverage with other insurers.

Jim Thompson, president, State Farm Florida, said the insurer was left without options in the state.

“Faced with steeply declining resources to cover future claims and expenses, State Farm Florida has little choice. This is not an action we wanted to take, but one we must take given the realities of the Florida property insurance market. We regret the impact this will have on our customers, employees and agents in Florida,” he said in a statement.

Thompson said that Florida’s hurricane exposure poses a tremendous financial risk to any property insurer but maintained that even without a hurricane, State Farm Florida’s operating costs have risen as day-to-day claims have increased both in their number and severity. During the first three quarters of 2008, a year with relatively modest catastrophe impact and no major hurricane, State Farm Florida saw its surplus reduced by $201 million.

The company said that state-mandated discounts have further contributed to the reduction in revenues.

In July, State Farm Florida filed for an overall statewide homeowners insurance rate increase of 47.1 percent. This filing was disapproved on January 12 by McCarty and the OIR.

“The state itself faces similar challenges as it deals with the fragile financial condition of government backed Citizens Property Insurance Corp.,” Thompson said. “State Farm Florida is a private company and must have adequate capital to ensure financial stability. And it is our responsibility to our policyholders to provide a sound financial framework for the coverages we offer.”

McCarty said the action, while disappointing, was anticipated.

“We have been hearing for months of possible plans to make such a move in Florida, including a document submitted to the Office as recently as Dec. 5 as part of their recoupment filing that showed an anticipated reduction to 655,000 homeowner policies by 2010,” McCarty said.

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

The commissioner also suggested that the private insurance market could pick up the business State Farm is leaving behind.

“To help ease the transition of policies, Florida already has new companies who are eagerly looking to grow their businesses and will welcome the opportunity to add more customers. I encourage everyone to work closely with their agent to choose a new company that will offer needed coverage at a price you can afford,” he said.

As national carriers like State Farm have grown skittish about the Florida market, domestic insurers have been grabbing more business. The jump in domestic market share is partly attributed to the increase in the number of new, homegrown companies that have started in Florida in the past several years.

In 2007, domestic private insurers wrote 39 percent of the multi-peril homeowners market— more than out-of-state carriers (24 percent), State Farm Florida (19 percent) or Citizens (18 percent), according to the OIR. In 1992, domestics wrote only six percent.

Since 2006, about 25 new domestic companies have entered the market. These carriers have introduced about $546 million in new surplus into the property insurance market. Some of the new carriers have benefited from $248 million in state funds made available for capitalization.

If private carriers are not able to assume the State Farm business, it could mean more accounts for state-backed Citizens Property Insurance, which has been shrinking somewhat over the past year.

McCarty noted that he has been working with state Sen. Mike Fasano, R-New Port Richey, on legislation that would limit the number of non-renewals an insurance company can issue in a year.

Florida Chief Financial Officer Alex Sink echoed McCarty that the decision was disappointing and also urged affected consumers to shop around. “Fortunately, there are a number of insurance companies that are committed to helping Florida’s families protect their property and assets. The Florida insurance market has become more competitive, and I encourage consumers to shop around when they begin to look for a new policy,” Sink said.

One agents’ group expressed concern over the effects of the move on the agents involved.

“Right now our thoughts and prayers are with the State Farm agents, who run small businesses in cities and towns all over the state; the uncertainty they face is tremendous and regrettable,” said Bob Lotane, speaking for the Florida chapter of the National Association of Insurance and Financial Advisors.

The group urged State Farm to free its agents to enter “brokering agreements outside of State Farm and minimize lost business due to this move.”

Lotane also took a shot at state officials. “Unfortunately this was quite predictable; the companies that largely rebuilt this state after the devastating 2004 – 2005 hurricane seasons have largely been reduced to political punching bags,” he said.

State Farm Florida was established in 1998 as a stand company. After billions of dollars of losses from a series of 2004 storms, State Farm Florida borrowed $750 million from State Farm Mutual. State Farm Florida has not been able to repay the note due to its financial condition, according to the company.