News Flash

Revised: 09/22/2006

Agency submits offer to Farmers

Department of Insurance sends proposed outline of settlement that would bring the company into compliance with the law

By Claudia Grisales
AMERICAN-STATESMAN STAFF
Tuesday, September 24, 2002
The Texas Department of Insurance proposed a settlement with Farmers Insurance on Monday in an attempt to keep the state's second-largest insurer from exiting the homeowners market.

Last week, Farmers said it was considering getting out of the home insurance market in Texas because of a dispute with regulators about its pricing policies. The Insurance Department has ordered Farmers to change what it claims are illegal pricing practices by Oct. 1 or face mounting fines and the possible revocation of its license.

On Monday, the department sent Farmers officials a proposed outline for a settlement that would keep the company in the state and bring it into compliance with the law.
The proposed settlement consists of four points:
* Farmers must pay restitution to its policyholders and make a "substantive" change in its pricing practices.
* The department will waive penalties if Farmers accepts the agency's proposal by Oct. 1 and does not pursue its agents for commissions on the overcharges.
* The department will drop its Aug. 13 "cease and desist" order to halt discriminatory pricing practices if the company makes changes.
* The department will expedite approvals of national Farmers property-coverage policies for the Texas market.
"The department must balance allegations of misrepresentation and unfair practices by Farmers while recognizing that its potential withdrawal from the Texas homeowners insurance market would have a detrimental effect," said Karina Casari, executive deputy insurance commissioner.

Farmers has almost 650,000 home insurance customers in Texas, nearly 20 percent of the total.

On Aug. 13, the department ordered Farmers to change pricing practices that included charging Texas customers for losses it suffered in other states and setting rates statewide without fair adjustments for regional differences in mold- and water-damage losses.
The company had 90 days to change its practices or face a fine of $150 million for the alleged overcharges, plus penalties of up to $25,000 for each infraction.

Farmers has already said it would stop writing new homeowners policies after Oct. 31, which is bound to send more consumers scrambling to find coverage among already limited options.
Bill Miller, an Austin-based spokesman for Farmers, said the company has not had a chance to review the proposal and was not prepared to comment.

The proposed settlement does not involve a separate lawsuit against Farmers by the state attorney general's office, although it involves many of the same issues.

On Friday, Jim Snikeris, executive director of Farmers' Austin Service Center, said the company was involved in ongoing talks with the agency in hopes that it could settle the issue before having to take any drastic measures.

But Farmers officials said they have not decided what to do about renewals for existing policyholders after Nov. 1. That decision will come during the next two weeks.

Farmers must give customers 30 days of notice if it cancels their policies.

S&P BULLETIN: Farmers To Exit Texas Homeowners Market

NEW YORK--(BUSINESS WIRE)--Sept. 25, 2002--Standard & Poor's Ratings Services said today that Farmers Insurance Exchange's (A/WatchNeg/--) exit from the Texas homeowners insurance market will have no effect on the ratings on any member of the Farmers group of companies.

As of November 2002, Farmers will not renew current homeowners insurance policies in Texas. While Farmers continues discussions with the Texas Department of Insurance, Farmers will no longer provide Texas customers with homeowners insurance coverage if a settlement is not reached. All other Farmers services in Texas -- including automobile, umbrella, flood, commercial, and life insurance as well as financial services -- are unaffected. The Farmers ratings remain on CreditWatch with negative implications, where they were placed on Sept. 5, 2002.

Texas is a strong source of premium for Farmers, having contributed 17.2% of the group's $12.5 billion in direct premiums written in 2001, of which about $650 million was in homeowners lines. However, Texas is also a driver of underwriting losses. Nationwide, the cumulative impact of rate increases and improved risk measurement has begun to reverse two years of underwriting losses. However, business generated in Texas continues to underperform, with the homeowners line posting a 242% combined ratio through June 2002 while it achieved a 100% combined ratio in all other states. Exiting the Texas homeowners market, while decreasing the management fees to Zurich Financial Services (Zurich), will relieve the strain on Farmers's statutory surplus, which was $3.3 billion as of June 30, 2002. Overall, Farmers improved the combined ratio across all lines to 108.5% as of June 30, 2002, from 119.5% as of June 30, 2001.

The ratings were placed on CreditWatch followed Zurich's announcement of reserve strengthening, asset depreciation, and restructuring charges, which were expected to place strain on Farmers's capital. Although Zurich does not own Farmers and is not directly affected by Farmers's underwriting performance, the management fees earned by Farmers Group Inc. provide a steady earnings stream that is integral to Zurich's strategy of enhancing the stability of its financial profile. As a result, Standard & Poor's considers Farmers strategically important to Zurich, and the ratings on Farmers benefit from this assumed implicit support. Standard & Poor's expects to resolve the CreditWatch status of these ratings in mid-October.

Copyright 2002, Standard & Poor's Ratings Services