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Revised:  09/22/2006

Texas State Office PO Box 149209 Austin, TX  78714-9209

                     

November 9, 2001

All Texas Agents, District Managers, DMMs 

RE:       Homeowners Insurance Environment 

Ladies and Gentlemen, 

This is the first of a series of letters I will be sending you regarding the status of our Homeowners business in Texas.  As you know, this part of our business has been the focal point of the Texas media this year, so it is important that all of us understand our current position and where we want to go from here. 

Historically, our homeowners business has been unprofitable, with underwriting losses in eight of the last ten years.  In fact, over the last two years, we have lost about $600 million in these lines of business in Texas alone. 

The Homeowners insurance environment has changed significantly for the worse in the last two years.  Rising claims costs driven by the dramatic increase in water, mold, and foundation claims frequency and severity have increased underwriting losses substantially.  These factors have resulted in some drastic actions by most carriers in our state, including our suspension of writing new HO-B contracts. 

Despite past efforts in the areas of pricing and underwriting, our results continue to deteriorate.  Specifically, losses from the water peril increased 158% from August 2000 to August 2001.  Mold claims experience is even more severe.  In 1999 we had twelve mold claims in Texas.  In 2000, we had 499 mold claims.  In 2001, we have close to 8,000 mold claims year-to-date (about 1,500 in September alone), and project more than 12,000 by year-end.  We expect claims of over $200 million for mold and related loss adjustment expenses in 2001.  These trends are alarming and we see no reason to believe this experience will improve.  In fact, it is more reasonable to assume that our results will further deteriorate. 

I want to emphasize that this is not a challenge unique to Farmers.  Other insurers have taken similar drastic actions to address this problem and have reported loss ratio results similar to ours.  Regardless of the actions other carriers may take, Farmers needs to take the appropriate action to address our 174% combined ratio.  

Consequently, effective November 17, 2001, we will begin to non-renew HO-B, TDP-2 and TDP-3 policies with renewal effective dates beginning December 30, 2001.  The policyholders will be requested to contact their agent, so you may write an HO-A or a TDP-1 policy in the Fire Insurance Exchange.  Until we are able to effect a mechanical rewrite (goal 3/01/02) we are increasing the Fire renewal rewrite commissions from 14% to 18% to assist you in defraying some of your expenses.  You will receive additional detail information on policy rewrite procedures.  

In addition, we will expand the HO-B moratorium.  We will not write new business or replacement policies for customers who now have the HO-B contract (or its equivalent in other states).  Nor will we write TDP-2, TDP-3 forms, or builder’s risk policies.  This will include existing customers who move from one residence to another within Texas and those who move in from out of state.  We recognize that there may be isolated situations where an agent has committed to placing HO-B coverage to close an escrow.  We will honor those commitments until December 30, 2001 with documentation.  In those cases, the underwriter can make an exception. 

We met with Commissioner José Montemayor in November 2000, to discuss the severity of the mold problem and our projections as to the effect on the industry.  In January 2001, we filed endorsements to exclude mold on the HO-B policy and have had follow-up meetings with the Commissioner virtually every month since that time.  On October 3, 2001, the Commissioner rejected our endorsement and we since filed and intend to serve suit to gain approval of these endorsements.  While the Commissioner has indicated he would announce a “mold solution” by November 1, 2001, he has yet to do so.  Our results (driven by water damage and mold claims) have reached a crisis point. 

In subsequent letters, I will bring you up-to-date on our plans to turn the situation around and achieve an underwriting profit in these important lines of business.  Please remember that each and every one of us must be part of the solution to this challenge. 

You may recall a recent request from our Texas Governmental Affairs office to look for customers who would be willing to write letters to Insurance Commissioner Montemayor in response to his request for consumer feedback on the mold coverage issue.  Some of you found customers who asked the Commissioner to exclude mold from the HO- policy to hold down costs and make the coverage optional.  We appreciate your helpful assistance and urge you to keep it up. 

Again, the homeowners and dwelling business in Texas has reached a crisis situation, and it is important that you inform your customers why this is happening and what the consequences could be.  It is important that they gain an understanding of the situation as we work together to find a solution that will help not only Farmers Insurance Group, but also the entire insurance industry, and ultimately the citizens of Texas.

 

 John P. Hageman, CPCU, GCA
 State Executive Officer 

c:           Jim Snikeris, CPCU, GCA
             Gregor Scott, LUTCF
             Staff Managers