Backgrounder: State Farm Florida Insurance Company

July 16, 2008 – State Farm Florida Insurance Company, a Florida-only property insurance company, (State Farm Florida), will be working with the Office of Insurance Regulation (OIR) in a cooperative and collaborative fashion to resolve the business challenges facing State Farm Florida. This backgrounder explains key factors underlying our recent 47.1 percent rate filing and is intended to provide perspective about State Farm Florida's position in the marketplace.

State Farm Florida's objectives are to:

• Charge rates that cover expected costs of loss and operating expenses.
  
  
• Stabilize State Farm Florida's financial condition in order to be able to pay our customers' claims, including those due to catastrophic events such as hurricanes.
  
  
• Take necessary and timely steps to ensure the risk of insolvency and other marketplace disruptions are minimized.
  
  
• Ensure that automobile insurance policyholders across the nation, and property insurance policyholders outside the state of Florida, are not required to subsidize the costs of providing property insurance in Florida (and vice versa).

State Farm Florida's financial position is projected to deteriorate to a deeply concerning level during the next 18 months, for reasons explained in this backgrounder. Absent any immediate action, we're projecting that by 2009, State Farm Florida's results will worsen to a net underwriting loss exceeding 100 percent. In other words, in 2009, for every $1 the company receives in premium income, after reinsurance costs, we expect to pay out more than $2 in claims and expenses. These projections assume no hurricanes make landfall in the state – were storms to hit, these figures would deteriorate more quickly and severely.

In recent months, State Farm Florida suspended making interest payments on the $750 million in outstanding surplus notes due to State Farm Mutual, in order to preserve State Farm Florida's capital. State Farm Florida has also limited its writing of new property insurance business in the state. (Presently, we only accommodate in-state transfers of business to eligible locations.) Even with these actions, State Farm Florida's present course is not sustainable.    

At current rate levels, State Farm Florida will soon be unable to cover expected costs of loss and operating expenses. State Farm Florida plans to work in cooperation with the OIR to achieve reasonable solutions to these challenges.

We recognize that our customers have a need for reliable property insurance coverage and that our rates must comply with legal requirements. We are also aware of the growing financial burden on Florida property insurance consumers, and that a rate filing of this magnitude could add to that burden. But prompt action is needed.

A significant portion of State Farm Florida's rate need is due to hurricane loss mitigation discounts. In June 2007, State Farm Florida agreed to make a rate filing that essentially doubled the hurricane loss mitigation discounts. The company also agreed to make the increased discounts effective even before the statutory effective date, as an incentive to consumers to pursue mitigation efforts and in recognition of marketplace affordability concerns.

Our experience with these discounts has been anything but as expected. A vastly larger number of properties are receiving the discount than could have been anticipated when the "My Safe Florida Home" program began. To date, more than 260,000 properties have qualified for the discount and we expect the number to grow to more than 300,000. In some cases, the discount exceeds 90 percent of the windstorm portion of the premium. These developments have triggered a significant and unanticipated decrease in State Farm Florida's projected revenue for 2008, 2009, and beyond.

State Farm Florida's financial stability is important to Florida's property insurance marketplace. In Florida's property insurance market, no private insurer has dedicated more capital to stand behind property insurance risks than State Farm. State Farm Florida is now larger than the next four largest private insurers combined.

In the current environment, both private and public property insurers are severely pressed for access to adequate capital. For those companies that were declared insolvent after the 2004/2005 storms, it's too late. Unlike a state-run insurer (Citizens) or re-insurer (Florida Hurricane Catastrophe Fund) that can issue bonds, levy assessments, and impose taxes to fund losses after an event, State Farm Florida cannot charge customers after the fact. It needs adequate capital up front to have the resources necessary to pay claims in a timely manner.

State Farm Florida needs adequate capital to meet its obligations to customers who suffer losses. As with any business, State Farm Florida must have income that covers its expected future costs and allows it to fulfill its obligations.

We understand the difficulty public officials face in responding to the current property insurance crisis. It is vitally important that state officials and private insurers, like State Farm Florida, work cooperatively to solve the challenging issues confronting all Floridians. State Farm Florida is committed to working with state officials to serve our customers.