State Farm to Stay in Florida, Cancel 15% of Policies, Raise Rates 15%

December 16, 2009

State Farm Florida will remain in Florida under a negotiated agreement that allows it to cancel about 15 percent of its policies and raise rates 14.8 percent. The deal also allows its contract agents to place the business State Farm non-renews with other private insurance companies.

Florida Insurance Commissioner Kevin McCarty announced the deal today.

State officials said the agreement is better than State Farm cancelling all of its 810,000 home and condo policies and having many of them end up in the state-backed Citizens Property Insurance Corp., which was a concern with the insurer’s original exit plan.

State Farm applauded the deal even though it falls short of its original plan and involves having its agents write with other carriers, a condition it had opposed.

“This is an important step. It helps stem State Farm Florida’s deteriorating financial condition. It reduces the company’s risk exposure. It moves us closer to rate adequacy. And for most of our customers it means that State Farm Florida continues to be there for them,” said Jim Thompson, president, State Farm Florida.

“I want to acknowledge the cooperation of the Office of Insurance Regulation in working through all of this. This was not easy for any of us. We were losing $20 million a month and we both were trying to work through some tough issues,” said Thompson.

The non-renewals of the 125,000 policies will begin in August under the plan. State Farm will decide which policies will be non-renewed and provide its agents with a list early next year, officials said.

Policyholders must be given six months advance notice of a non-renewal so notices would not begin until February and the entire non-renewal process will take 18 months.

Officials with the Office of Insurance Regulation (OIR) said State Farm will work with its contract agents to obtain servicing agreements with private carriers and help them utilize the voluntary market assistance plan to also place the business with private carriers. They said 16 carriers have already agreed to become servicing carriers for the State Farm agents and more may sign up.

McCarty emphasized that the 14.8 percent across-the-board rate increase was substantiated by additional actuarial information supplied by State Farm that was also run through risk models.

“In no way are we giving them 15 percent as a compromise,” McCarty said. The insurer was able to substantiate the need for the hike, he said.

The announcement by McCarty comes after almost a year of negotiations between regulators and State Farm Florida during which time State Farm Florida has seen its net worth decline and its financial strength downgraded by rating organizations.

A state administrative court hearing on State Farm Florida Insurance’s exit plan that had been set for Dec. 17 was postponed for the third time. At the request of officials for both the insurer and the OIR, it was rescheduled to Jan. 25 before the Division of Administrative Hearings in Tallahassee. That hearing and all legal proceedings involving the withdrawal have now been cancelled.

State Farm announced in January, 2009 that it wanted to withdraw from the state due to its inability to obtain approval for rate increases.

In 2007, McCarty and State Farm agreed on a 9 percent rate reduction after the company obtained a 52.8 percent increase in 2006.

In July, 2008, the insurer filed for a statewide rate increase of 47.1 percent. The proposal ranged from 23 percent in inland areas to 86 percent along Florida’s coasts.

The 47.1 percent filing was disapproved on Jan. 12 by McCarty and the OIR.

Soon thereafter, the company submitted a withdrawal plan designed to trigger a two-year process of non-renewing its more than 800,000 policies in the state.

The OIR balked at parts of State Farm’s plan including the insurer’s refusal to allow its agents to place the policies being terminated with other insurers. OIR has also tried to limit the number of State Farm policies that end up in the state-backed insurer, Citizens.

State Farm has defended its plan as financially necessary. The administrative court had been asked to settle the dispute but the parties continued to talk.

Last month, Insurance Commissioner Kevin McCarty said he was hopeful that the parties would be able to reach a settlement and that the major withdrawal could be avoided.

In August, McCarty gave State Farm approval to eliminate some of the home insurance discounts it had been offering — a change that effectively gave State Farm a premium increase of about 28 percent.

While Thompson said this latest consent order helps move the company toward its goal of stabilizing its financial condition, he cautioned it is a long-term process with many continuing challenges.

“As State Farm Florida tries to rebuild its financial strength, it still faces significant issues in order to meet its obligations to policyholders. Equally important is a stable regulatory environment that supports a viable and sustainable private property insurance market in Florida,” Thompson said.

Even after the non-renewals, State Farm Florida will remain the largest private insurer of homes in Florida. Its property and casualty lines include homes, rental dwellings, apartments, small businesses, boats, personal liability, and commercial liability. State Farm agents also offer products through State Farm Mutual Automobile Insurance Co. and its affiliates, such as auto insurance, life insurance and financial services products.

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