A hurricane didn't prompt State Farm to pull out of Florida's frail property insurance market, but the ramifications are hitting like a Category 5.
The state's largest private insurer will drop 1.2 million policies over the next two years, likely pushing many into the already bloated state-run insurer of last resort, Citizens Property Insurance Corp. More than 800 State Farm agents can expect to see their income slashed by an average of 37 percent, according to documents obtained by the St. Petersburg Times.
And Tallahassee, once more, will take on the state's rising exposure to catastrophic damage.
State Farm Florida's policy shedding is widespread, affecting house and condo owners, renters and customers with coverage for personal liability, boats, personal articles, and business property and liability. The insurance giant is hanging on to some lines, including its lucrative, market-leading auto insurance business and life insurance.
State Farm Florida president Jim Thompson said that even without any major hurricanes in the past three years, the Florida operation has been losing $20 million a month and was on pace to go insolvent by 2011. Losing a recent legal battle to hike its property insurance rates by an average of 47 percent was the last straw, he said.
"We regret the impact this will have on our customers, employees and agents in Florida,'' Thompson said. "However if we had any further weakening of our financial situation, we would not have been in a position to pay all of our claims going forward.''
State Farm created State Farm Florida in 1998, potentially limiting its liability to hurricane damage. About 500 of State Farm Florida's 4,800 employees are directly involved with the property insurance business, but Thompson anticipated avoiding layoffs because many are expected to leave voluntarily. In addition, 4,500 people work for its agents.
Several agents contacted Tuesday declined to talk, citing company policy.
Joe Belth, editor of the Insurance Forum, an Indiana-based newsletter, said the pullout highlights how the private insurance industry is not in a position to handle Florida's catastrophic exposure.
"This is the kind of problem that should be handled on a national basis (with a national catastrophe fund), but people in Iowa aren't particularly interested in paying for hurricane exposure in Florida,'' he said.
But to Gov. Charlie Crist, the issue was State Farm's obstinacy in seeking rate hikes. His reaction: good riddance.
"They probably charge the highest rates in the state, anyway. Floridians will be much better off without them,'' he said. Asked if State Farm was "posturing,'' Crist replied: "I don't really know, and I don't really care.''
The decision angered many, with some blaming State Farm and some blaming the state.
Al Steenson, a 74-year-old South Tampa resident and State Farm policyholder for more than three decades, said he and his wife have homeowners, auto and flood insurance through the insurer. If the company is allowed to pull out of Florida, Steenson said he will have a few choice words for his insurance agent.
"If they're not going to renew our homeowners' (insurance), then we are going to cancel our auto insurance and everything else," he said. "We will no longer be policyholders. That's exactly the way I feel."
Steenson's options are limited. Many of the remaining national insurers, like Allstate, are not writing new policies, while some of the smaller, startup insurers have smaller reserves and have not been tested by hurricanes. He could end up with Citizens, which remains the largest property insurer in Florida despite attempts to push policies into the market. If he becomes a Citizens' customer, he could face aggressively higher rates when a rate freeze expires next year.
The Florida Insurance Council put the onus on the state Legislature for failing to address ways to keep the Florida Hurricane Catastrophe Fund more stable and allowing insurers to set rates that reflect the risks in the market.
Bob Lotane, spokesman for the National Association of Insurance and Financial Advisors in Florida, added that State Farms' pullout was 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.
Regulators must approve proposal
To minimize disruptions to customers and allow them to find alternative coverage, State Farm told regulators it wants to phase in the cuts over two years. State Farm spokesman Chris Neal said policyholders don't have to take any immediate action, stressing "nothing is going to happen today.''
Before State Farm can proceed, the Florida Office of Insurance Regulation has 90 days to review and approve its plan. Then, State Farm has to provide 180 days notice to customers before it drops any policy.
State Farm said it is mailing state regulators a detailed withdrawal plan. A copy of the plan obtained by the Times indicated that the company would drop 470,000 policies in the first year when they came up for renewal. It would drop all the boat-owner policies in the first year.
Based on the 90-day notice required under the plan, State Farm Florida would drop the last policy by the end of 2011, at which point the company would surrender its license to market property insurance in the state.
According to the withdrawal plan, the 2004-2005 hurricanes put the company on the path to insolvency.
At the end of 2005, State Farm Florida had a surplus of $561 million, only after a $750 million bailout note from its parent company. In the first nine months of last year, its surplus shrank by $201 million. At that pace, State Farm said, Florida regulators may have been forced to start delinquency proceedings against the company as soon as late 2010.
State Farm blamed the decision to pull out, in part, on the state-imposed doubling of discounts for property owners who shore up their homes against hurricane damage (the Windstorm Mitigation Discount Program).
Florida Insurance Commissioner Kevin McCarty said his office would carefully review State Farm's intended plans to ensure that they are in compliance with Florida law.
One loophole the company uses is already under scrutiny. Two years ago, during the special session on insurance, the Legislature created a new law to prevent companies from selling auto insurance while pulling back on property insurance. The Legislature's effort, however, was watered down and applies to few, if any, companies.
In State Farm's case, the company avoided the conflict by transferring all its auto policies to its parent company, State Farm Mutual Automobile Insurance Co., which doesn't sell homeowners insurance in any state.
Crist said Tuesday that he would like to see the Legislature strengthen that law. "I'd imagine some very good members of the House and Senate will look at it, and we'd support them on it," he said.
McCarty said his office is also working with state Sen. Mike Fasano, R-New Port Richey, to develop legislation that will limit the number of polices a company can drop in a year. Fasano wants that legislation to be retroactive.
But Thompson of State Farm said any new legislation is too late to affect the company's destiny.
"If we're not allowed to drop the policies, we'd become insolvent and there would be no money to pay claims anyway,'' he said. "We're not using this as a negotiating tool. … I don't see anything in the near future that could change our mind.''
Times staff writer Sherri Day contributed to this report. Jeff Harrington can be reached at firstname.lastname@example.org or (727) 893-8242. Jennifer Liberto can be reached at email@example.com or (850) 224-7263.
By the numbers
1.2 million Policies affected
826 Agents in Florida
37 Percentage decline in average income for agents
4,801 Employed directly by State Farm Florida
4,479 Employed by State Farm agents in Florida
Sources: State Farm, Office of Insurance Regulation