After years of offering lower rates than its competitors because the company had more than enough surplus to back up any losses, State Farm continues to pull back on its sales in 25 states as its tactics catch up with its bottom line.

State Farm says all the restrictions are expected to be limited in duration. "We feel it is our responsibility to work on maintaining a strong financial base for our existing customers," says State Farm spokesperson Phil Supple.

Not everyone agrees that the company is only looking out for its customers. "Competitors understand State Farm's historical 'mountain of cash' allows it to lowball [auto and home insurance] premiums whenever it wants," says Dennis Farrell of State Farm Agents Who Care. The group is made up of current and former State Farm agents and has in recent years taken the insurer to task for what it sees as immoral and unfair business practices.

"State Farm uses its liberal underwriting rules to write new business," says Farrell. "The anticipated losses are temporarily supported by its huge cash reserves. This practice limits competition because other insurers can't compete with a 'loss leader' marketing scheme." However, even State Farm cannot keep underpricing policies. In order to raise rates once significant market share has been established, "State Farm has a national practice of threatening to initiate a moratorium or withdraw whenever it doesn't get the relief it wants," says Farrell.

The company suffered a $5.3 billion loss nationally in 2001 on $41 billion in business after a $3.3 billion loss in 2000. However, State Farm is confident that it has made the right moves to uphold its financial strength, including hiking home insurance rates in 2002 by as much as 21 percent in Washington, D.C., 25 percent in Maryland, 31 percent in Illinois, and 36 percent in Virginia.

State Farm is not a publicly traded company but is instead a mutual insurance company owned by its policyholders. The company had a $20 billion surplus in 1992, which has doubled to more than $40 billion today.

Reasons for losses

Reasons for State Farm's losses vary from mold-claims issues to too-low rates. In states such as Texas, a tremendous increase in mold claims on home insurance policies caught the company off guard. California is also seeing a spurt in mold claims, and State Farm doesn't even have a claim category for mold yet.

In Louisiana, State Farm faced inadequate home insurance rates, in part because the rates it initially offered were lower than the market average. Now State Farm needs to make up some of that difference, but the Louisiana Insurance Rating Commission declined to grant the company the 15 percent increase in home insurance rates that it had requested. The company says it then halted sales in order to maintain enough money to cover potential claims from existing customers.

Rates have also been an issue in New Jersey, where State Farm wants to stop selling auto insurance altogether. In addition to these issues, State Farm says its claims expenses have been affected nationwide by things like hailstorms that caused millions of dollars worth in damage, windstorms that left whole communities devastated, and the rising costs of construction and medical treatment.

State Farm says that while its business has grown in many states, in some cases the growth can be too fast for the company to keep up. In addition, the company says new business often costs more money than older business.

Though State Farm says the threat of nonrenewal should not be an issue for existing policyholders, people like Scott Lakin, director of the Missouri department of insurance, have expressed concern about the rising occurrence of nonrenewals by home insurance companies in general. "Are they sending a subtle message that you should not file legitimate insurance claims or your rates will go through the roof?" he asks.

State Farm says it nonrenewed about a quarter of 1 percent (.271) of its home insurance policies in 2001. Auto insurance renewal is based on your driving record, "so people can drive themselves into nonrenewals," says Supple, but the company has no plans, other than in New Jersey, to not renew auto policies already in place.

Supple declines to say which states the company is watching for future developments, saying "competitors would love to know that."