Profits, Rate Requests Fuel Anger Over Insurers’ ‘Pups’

The Tampa Tribune--August 12, 2008

By JEROME R. STOCKFISCH

In February, the Illinois-based State Farm group of insurance companies reported the company’s fifth consecutive profitable year.

Five months later, State Farm’s Florida operation asked regulators for an average rate increase of 47.1 percent for homeowners’ policies, citing its deteriorating financial position.

It’s upside-down numbers like those that have worked ratepayers and state lawmakers into such a lather that last year the Legislature banned the establishment of Florida-only subsidiaries of out-of-state insurance companies. The law takes effect at the end of the year.

“When they come before us and they want to raise their rates by 47 percent, our question should be this: What are your profits?” said state Sen. Mike Fasano, R-New Port Richey, a sponsor of the bill that banned what have come to be called “pup” companies, smaller versions of their parent companies.

Profits “should be in the calculation by OIR the state Office of Insurance Regulation before any rate increase is granted,” Fasano said. “And you know something? No increase would ever be granted with the numbers they’re reporting.”

Liz Reynolds, state affairs manager for the National Association of Mutual Insurance Companies, says otherwise. The current scenario “is a way for companies wary of doing business in a state vulnerable to severe storms to enter the market,” Reynolds said. “Prohibiting them reduces the likelihood of companies doing business in Florida, which ultimately reduces competition for consumers and drives up prices.”

Major Insurers Will Keep Pups

The state’s major private home insurers, including Allstate, State Farm and Nationwide, can continue to operate separate Florida companies as long as they hold active certificates of authority to do business in the state. Once granted, those certificates do not have to be regularly renewed, although they can be revoked.

State Sen. Bill Posey, R-Rockledge, another sponsor of the measure that passed in the 2007 regular session, said there were legal concerns with dismantling companies that are operating lawfully in the state.

Regulators allowed insurers to isolate their Florida operations in the wake of Hurricane Andrew, which struck south of Miami in 1992. Four years later, the market was still reeling, and Democrat Bill Nelson, now one of the state’s U.S. senators from Tallahassee, had just assumed the office of state insurance commissioner.

The big insurance companies were clamoring to separate their Florida businesses and threatening to pull out of the state if they couldn’t. Nelson gave them the go-ahead.

The key argument was that rates are set at the state level, based on risks from state to state, said Justin Glover, a spokesman for State Farm.

“An insurance commissioner in Nebraska would not allow an increase for their policyholders for a hurricane, just like current Florida commissioner Kevin McCarty would not allow a rate increase in Florida for other types of activity outside the state,” he said.

Under the current scenario, the parent companies don’t have to report big losses in Florida on their books. That raises the prospect of a pup going belly-up in the wake of a catastrophe, although that hasn’t happened and the big national companies aren’t likely to tarnish their reputations by allowing it.

After the four-storm season of 2004, the State Farm parent lent its Florida subsidiary $750 million to help pay claims. In its rate request filing this month, State Farm Florida said it had suspended making payments on the loan.

Storm Seasons Pushed Pup Issue

With the homeowners insurance crisis following the back-to-back four-hurricane seasons of 2004-05 – and an aggressive push by then-gubernatorial candidate Charlie Crist – lawmakers did an about-face on the pup issue.

In 2007, a year in which Allstate asked for a rate increase in Florida from 28 percent to 42 percent as its national parent was earning $4.6 billion in profit, the Legislature took up the pup issue in the regular session after passing sweeping homeowner reforms in a special session.

The existing pups will continue to do business as is, including three of the top five insurers in the state with a combined one-third of the market share, and that may mean the state’s new strategy won’t have a significant effect after Jan. 1.

Fasano fought unsuccessfully to ban the existing Florida-only subsidiaries, and vows to keep up the fight.

“If I hear one more time that the insurance industry is hurting in the state of Florida … You’re at the point where it’s becoming laughable,” he said.

“I wish pups never existed. They should never have been created,” Fasano said. “We should, as a Legislature, not be concerned about whether courts would stop us from doing it. We should do what’s right, then fight our battles.”