Despite high premiums, Texas home insurers continue to lose money as changes in state regulations are urged

Fort Worth Star Telegram

When Bob Hunter moved from Arlington, Va., to Austin in 1993 to become the state’s insurance commissioner, he found out that everything is bigger in Texas — including his home insurance premium.

Hunter said he bought a house of similar value and kept the same insurance company. But his homeowners insurance premium roughly doubled.

“I asked State Farm, my insurer, to support their rate,” said Hunter, who is now director of insurance at the Consumer Federation of America in Washington. “They showed me over a decade the losses in Virginia and in Texas, in Arlington [Va.] and in Austin. Everything was about the same for theft and fire and other losses, but the big difference was hail and wind. There was almost nothing in Arlington [Va.], and it was huge in Austin.

“I asked several of the leading writers to back that up, and it was the same,” he said. “So you’ve always had high rates in Texas compared to other places.”

In 2001, Texans’ average homeowners insurance premium was $937, which was 77 percent higher than the estimated U.S. average of $530. The difference was 88 percent in 1995, the year that Hunter left his post in Texas.

With premiums rising and insurers threatening to leave the state, homeowners insurance has become a hot election-year issue in Texas.

Industry leaders, regulators, politicians and consumer groups all agree that changes in the state’s insurance regulation system are virtually certain when the Texas Legislature meets next year.

What is also clear, based on regulatory filings by insurance companies, is that high premiums haven’t brought high profits to Texas insurers.

Between 1991 and 2000, the Texas homeowners insurance business lost money, even after counting gains that the companies made on their investments, said David Eley, senior policy adviser at the Texas Department of Insurance in Austin.

The losses on about $23 billion worth of premiums during those 10 years amounted to 0.3 percent of the insurers’ net worth. Return on net worth — a company’s assets minus its liabilities — is how regulators judge an insurer’s profitability.

“When they say they’re not making money in Texas, they’re not kidding,” Eley said. “This is the bottom line.”

During the decade, the returns ranged from 20.7 percent net profit in 1997 to a 38.8 percent net loss in 1992, a year that saw a huge hailstorm.

Comparable figures for 2001 have not yet been released by the National Association of Insurance Commissioners, which compiles regulatory data for all the states. But based on Texas Department of Insurance filings, which don’t always include investment gains, 2001 showed far greater losses than any other year in the previous decade.

Mold crisis

In 2001, homeowners insurers in Texas lost more than $1.8 billion, even with the highest average insurance premiums in the country, according to filings from the insurers.

Those losses included $1.3 billion in water and water-related claims, including mold, according to reports filed with the insurance department. That compared with an average of about $380 million a year from 1995 to 1999, the years before water claims began to escalate in 2000.

Although insurers bemoan that expense, they also note that it’s not likely to be repeated after this year. That’s because new homeowners policy forms approved by the Department of Insurance can exclude coverage for mold and limit water claims to “sudden and accidental” damage, as is standard in every other state.

“You’ll see a moderation in mold and water claims,” but only because Texas policies won’t cover as much as in the past, said Bob Hartwig, chief economist of the Insurance Information Institute.

“The Texas form was far more liberal in terms of water coverage than the other 49 states,” he said.

“Hopefully, the claims value will start to go down,” said Keith Androff, a spokesman for State Farm Lloyds, the state’s biggest homeowners insurance company. “When will it level out? I wish I

knew. We’re only six months into using the modified form.”

Insurers aren’t predicting lower rates, but they do agree rates should level off.

At the same time that Texas insurers have seen mold and water claims soar, they have also been hit by a drop in returns on their investment portfolios, which normally provide a bit of a cushion.

According to industry reports, total investment income for all property-and-casualty insurers in 2001 was $37.1 billion, down nearly 9 percent from $40.7 billion in 2000. Losses on stocks and

lower interest rates were blamed.

Investment income doesn’t come close to closing the gap between what insurance companies are taking in from homeowners insurance and what they are paying out, said Hartwig.

He said investment income in 2001 attributable to homeowners insurance amounted to about $1.1 billion for the entire nation. That would leave about $132 million for Texas, based on its share

of U.S. homeowners insurance premiums.

Cash infusion

State Farm Lloyds provides a window into how the past year went for insurers. Nearly a third of the state’s homeowners are insured by Dallas-based State Farm Lloyds, a subsidiary of State Farm Mutual in Illinois. State Farm Lloyds is also a particularly good example because, unlike many insurers, it does business only in Texas and writes mostly homeowners insurance.

The link between Texas and Illinois has been important in the past year. State Farm Mutual has sent more than $1 billion to its Texas company to replenish its shrinking surplus.

The surplus refers to the amount of capital an insurer has after subtracting liabilities from assets. Regulators require insurers to maintain a surplus equal to at least a third of annual premiums.

As of Dec. 31, 2000, Dallas-based State Farm Lloyds’ surplus was a healthy $708 million. It writes about $1 billion in premiums annually.

But by June 2001, the surplus stood at $398 million and was falling fast. On Nov. 15, State Farm Mutual sent $350 million to its Texas operation. It barely kept Texas above water.

By Dec. 31, 2001, State Farm Lloyds’ surplus was down to $83 million, far below the minimum required by the state.

So the Illinois parent sent another $300 million to Texas. Continuing losses whittled the surplus down to $247 million by June 30. In July, State Farm Mutual sent Texas its biggest check yet, for $400 million.

That’s just over $1 billion in less than a year.

The cash transfusion was spurred by large losses at State Farm Lloyds. According to Texas Department of Insurance data, the insurer lost $943 million in 2001 before taxes. That followed a $208.7 million loss in 2000. Both figures include investment income of nearly $90 million for each year.

Through the first six months of this year, the most recent period for which financial information is available, the company lost $376 million before taxes, TDI said.

“The rate of loss over the last 12 to 18 months has been significant,” said Richard Attanasio, a senior financial analyst at A.M. Best Co. A.M. Best put State Farm Lloyds on its watch list for possible downgrade of its credit rating, based on the declining surplus, but it affirmed the existing rating after its parent boosted the Texas company’s surplus.

Texas Department of Insurance officials say they never doubted that State Farm Mutual, the parent company, would keep its Texas subsidiary operating.

“We’re always concerned when surplus drops that dramatically,” said Tony Trevino, a financial analyst for the insurance department. “The approach is, what are you going to do about it? They said what they would do and did it.”

Disputed losses

The most conspicuous source of State Farm Lloyds’ woes was incurred losses, which rose nearly 60 percent to $1.2 billion. For all the insurance companies writing homeowners policies in Texas,

incurred losses rose 52 percent, to $3.65 billion, according to TDI figures.

Those losses amounted to 117 percent of homeowners insurance premiums earned in Texas last year. The previous 10 years, incurred losses averaged 68.9 percent of premiums.

The sharp jump in incurred losses has raised eyebrows among Hunter and other consumer activists, who are skeptical of insurance industry claims of poverty. They ask whether the reported losses aren’t inflated for political effect.

Incurred losses include not just money paid out on claims, but money that an insurer reasonably expects to be called on to pay even if a claim hasn’t been made yet.

That means incurred losses are considerably more fluid than the black-and-white figure on a financial report.

Doug Heller, senior consumer advocate at the Foundation for Taxpayer and Consumer Rights in California, was skeptical about whether insurance companies losses will be as big as the companies are saying they will be.

“I’m sure paid losses will not ever make up those incurred losses,” he said, urging regulators to scrutinize the incurred losses figure.

Stephanie Eakins, a financial analyst with Weiss Ratings, an independent insurance and banking research firm, said the insurance companies have to come clean on loss estimates. Regulators require insurers to separately list their estimates of losses, as opposed to the claims that are filed.

For example, State Farm Lloyd’s 2001 filing with Texas regulators listed $68.2 million in what are called “incurred but not reported” losses. Those are losses that the company said it expected to have to cover, but which had not yet been reported by policyholders.

That amounts to about 5 percent of State Farm‘s total 2001 incurred losses.

“If that’s all it is, they’re not fluffing their numbers,” Eakins said.

In any event, she said, State Farm Lloyds will have to report how those anticipated losses develop in coming years. That figure is also disclosed on their regulatory filings, she said.

State Farm Lloyds’ 2001 TDI filing showed that the company underestimated its 2000 losses, by $115.3 million. State Farm‘s Androff said the company was confident its claims estimate wil prove accurate.

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Jim Fuquay, (817) 548-5534 [email protected]