State Farm has cut a deal with Florida regulators, reversing its plan to pull entirely out of the state's hurricane-prone property insurance market.
Instead, the state's largest private homeowners insurer will drop 15 percent of that business, about 125,000 policies, and raise rates for the rest by 14.8 percent.
State Farm spokesman Chris Neal said the settlement "allows us to stay in the game a little longer" as Florida continues to seek a long-term solution for its exposure to costly storm damage.
In January, State Farm said it was pulling out of the state's property market because it couldn't charge high enough rates to be profitable. The Illinois insurer had initially sought a 47 percent average rate increase.
Under terms of a consent order with Florida announced Wednesday, State Farm is allowed to drop 125,000 of its 810,000 residential insurance policies starting in August.
It also was granted a flat 14.8 percent rate increase for all its homeowners and condo policies when they come up for renewal.
Florida Insurance Commissioner Kevin McCarty said the size of the rate increase he approved was justified based on hurricane risk models, a drop in premiums and higher costs to State Farm for reinsurance.
"In no way are we giving them 15 percent as a compromise," McCarty said Wednesday.
McCarty and Gov. Charlie Crist had originally played hardball. Regulators objected to terms of State Farm's withdrawal plan, triggering a legal dispute before the state Division of Administrative Hearings. They expressed confidence the cluster of small, Florida insurance startups would be able to absorb much of State Farm's portfolio. The governor went as far as to say Floridians would be much better off if State Farm left.
In recent months, however, regulators have increasingly softened their rhetoric.
"A smaller, leaner State Farm in Florida is better than no State Farm at all," McCarty said Wednesday. "And that continues to be our position."
McCarty has said he sympathizes that it's tougher for insurers to make money and has approved a string of property insurance rate hikes for other carriers, some in the double-digits.
Crist was also more conciliatory, saying the approved rate increase "is much smaller and will create more choice for the consumer while retaining thousands of Florida policy holders. I applaud Commissioner McCarty."
The news is a reprieve for State Farm's nearly 800 insurance agents in Florida who stood to see their income slashed by an average of 37 percent with the lost business, according to an internal analysis.
"This is an important step," said Jim Thompson, president of State Farm Florida. "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."
State Farm agreed to free its agents to write policies with other carriers in placing its nonrenewed customers. However, McCarty said many of the 125,000 policies being shed could still end up with state-run Citizens Property Insurance.
The more Citizens grows, the more Floridians are at risk of a major assessment in the wake of heavy hurricane losses. Under state law, Citizens is allowed to assess all insured Floridians if it doesn't have enough money to pay storm claims.
The fear of a widespread State Farm pullout was that it would flood Citizens, which insures those who cannot find property coverage on the open market.
"What we were talking about in the beginning of the year was losing 800,000 policies and that would have been a really difficult thing for Citizens to deal with … so this is a much more viable plan," said Belinda Miller, Florida deputy insurance commissioner.
Even before Wednesday's announcement, regulators were making it more palatable for State Farm to stay. In August, regulators approved State Farm's request to eliminate or reduce some discounts it offers policyholders. The move effectively increased premiums for some homeowners as much as 28.4 percent and amounted to an additional $278 million in premiums.
Regulators conceded that the rate hike would be a double whammy for those already losing State Farm discounts.
In January, State Farm described its situation as dire. Its Florida operation was on a path to insolvency, the insurer said, and a partial rate increase (shy of the requested 47 percent) would not be enough to keep it in Florida.
What's changed since then?
Neal said the combination of the discarded discounts, a partial rate increase, and 125,000 discarded policies are enough to buy the company more time. The company also has not written any new property insurance policies for two years and other policyholders have left voluntarily amid the threatened exodus, helping reduce its exposure.
Still, State Farm officials described Wednesday's resolution with the state as a temporary fix.
"While this does help and moves us to restore our financial stability, it doesn't solve the problem of Florida's property insurance market," Neal said. "There's a long list of problems, but first and foremost are hurricanes. We've been very fortunate here the past five years, but I don't know how much longer that's going to last."
That was a mantra echoed by politicians, regulators and insurance reps throughout the state.
McCarty repeated his call for a national solution to paying for devastating losses from catastrophes like hurricanes and earthquakes.
"This is not a Florida problem," McCarty said. "Ultimately, this is an economic threat to America."
Times staff writer John Frank contributed to this report. Jeff Harrington can be reached at [email protected] or (727) 893-8242. Follow him on Twitter at twitter.com/jeffmharrington.