Realizing that generating new insurance volume doesn't necessarily ensure profitability-and may even suppress it-State Farm Mutual Automobile Insurance Co. began implementing a strategy to suspend writing new homeowners policies in 17 states.The Bloomington, Ill.-based insurer is also setting the wheels in motion to fully exit the New Jersey auto insurance market over the next five years. State Farm's geographic retrenchment comes on the heels of a reported $5 billion net loss incurred since 2001. The losses were marked by rapidly increasing claims costs due to an inordinately high series of natural disasters-from hailstorms to flooding.
These losses prompted Standard & Poor's in March to place its triple-A financial strength ratings on all State Farm's interactively rated operating companies on "credit watch" with negative implications. In May, State Farm's rating was downgraded to double-A plus, but Standard & Poor removed the carrier from credit watch status, says Kevin Maher, an analyst at New York-based Standard & Poor's.
In June, State Farm disclosed that it would cease offering new homeowners insurance in 17 states to boost profitability. The affected states are Alaska, Arkansas, Arizona, California, Hawaii, Kansas, Louisiana, Maryland, Missouri, Montana, North Carolina, Oklahoma, Oregon, Texas, Virginia, Washington and West Virginia.
"A lot of minor catastrophes and claims marked by litigation-combined with lower investment income" precipitated the pull-out, says Zoe Younker, spokesperson for State Farm. "Last year, for every premium dollar we took in, we paid out $1.14 in claims," she says. "We plan to eventually write new homeowners insurance in these states again, but can't speculate on when that will occur."
The timetable for State Farm to return to conducting business in these states may hinge on how significantly and swiftly its market share tumbles as competitors come in to fill the breach, observers say.
Take a hike
But as State Farm has learned, generating volume does not equate to profitability. This made the decision to temporarily leave these states easier. "New customers tend to have greater claims activity than existing customers," Younker explains.
When claims costs consistently rise over a period of time, carriers seek to secure necessary rate increases with state insurance regulators to cover current and projected losses. One recourse State Farm took prior to leaving these states was petitioning for a rate increase, which for the most part was roundly rejected.
"State Farm did not receive the level of increase it needed to remain profitable," Standard & Poor's Maher says. "It can take a year to 18 months to push these things through."
In New Jersey-a state long known for having an acutely politicized regulatory system-State Farm's decision to exit the auto insurance business speaks volumes about its inability to not only thrive, but survive, says Younker. "We could not price auto insurance adequately in New Jersey, and projected that we wouldn't have the reserves to cover claims going forward."
Starting in September and continuing for 23 months, State Farm will notify about 4,000 customers a month that their auto insurance policies will not be renewed. Those customers will be chosen at random from a pool of about 208,000 policyholders who buy only auto insurance from State Farm and signed on with the company since January 1996.
The conditions are designed to spare long-time State Farm customers and those with multiple lines of coverage from losing their coverage. People who are potentially subject to being dropped will be notified they are in the pool.
State Farm-New Jersey's largest auto insurer, covering about 730,000 of the state's 4.8 million vehicles- will be able to dump about 13% of its auto insurance customers over the next two years. But it must delay any attempt to pull out of the state completely until 2007 at the earliest, according to New Jersey regulators.
