When two of Florida's largest insurers requested huge rate hikes recently, they also asked for profit margins of about 15 percent, much higher than the industry average. That has the state's insurance consumer advocate asking whether the insurers are inflating their rate hikes.

Nationwide Insurance Co. of Florida and State Farm Florida both filed for hefty statewide rate hikes during the past month: 71.4 percent for Nationwide and 79 percent for State Farm. And both companies also included in their requests large underwriting profit margins of about 15 percent.
 
Most home insurers in Florida seek about a 3.7 percent profit margin, state regulators said.

"They don't have a unified rationale for a 15 percent surplus," said Stephen Alexander, an actuary for the state's insurance consumer advocate. "There's no consistent rationale for why these things are necessary."

Alexander said that, with the money Nationwide earns from its investment income, its Florida profit margin could top 20 percent. Nationwide is a unit of Nationwide Financial Corp. (NYSE: NFS, $44.52.)

The profit margins affect rate hikes. If State Farm Florida's profit margin were reduced from the 14.9 percent it requested to 3.5 percent, its statewide rate hike would drop from 79 percent to 47 percent, according to a report by Steve Burgess, the insurance consumer advocate.

Insurance Commissioner Kevin McCarty said insurance companies need the chance to make a healthy profit to stay here. But he said the appropriate profit margin would be closer to 10 percent.

"In order to provide incentives we have to have a greater rate of return," he said. "It doesn't reach the levels they've sought in the filings."

The insurance companies say the high profit margin simply reflects the greater risk of doing business in Florida, which has been socked by eight hurricanes during the past two years.

"To call it a profit is a misnomer. We're playing catch-up in our rating and our ability to capitalize Nationwide of Florida," said Joe Case, Nationwide's spokesman.

The company lost all the profit it earned since 1992 during the past two years, Case said.

Regulators are planning to examine the high margins closely.

"They can file what they want and we'll just look at it," said Bob Lotane, spokesman for the Florida Office of Insurance Regulation. "Regardless of the reasoning, if the math doesn't work, it doesn't work and we'll refuse it."

Chris Neal, State Farm Florida's spokesman, said the company first turned a profit in 2003. But after the 2004 storms, State Farm Mutual, the parent company, had to pour $750 million into its Florida subsidiary. In 2005, Neal said the company broke even with no surplus and no cash infusion.

"If anyone is implying there's any profit motivation, they're mistaken."

State Farm Florida's calculations have indicated for several years that it needs to have a 14.9 percent profit margin in Florida, but it did not ask for that margin until this year's filing, Neal said.

That filing is now being amended to raise rates even higher. The reason is more expensive reinsurance, or insurance for insurance companies. Neal couldn't say what would be in the filing, which he said State Farm Florida expects to submit to regulators sometime this week.

Alexander said he hasn't finished his analysis of Nationwide's rate request, but he is concerned about a number of other things, including the fact that the company is anticipating far more catastrophes than its computer models indicate.

"They're loading in a much higher catastrophe load than we've seen in the past," Alexander said.

But Case said this is just another way for Nationwide to "play catch-up" after paying out more than $1 billion in hurricane claims during the past two years.

"We're behind the eight ball in terms of our comfort level and maintaining long-term stability in the state," he said.

Alexander is also concerned that both State Farm Florida and Nationwide are buying most of their reinsurance from their parent companies, meaning there's no way to tell if the companies got the best possible rate.

But observers say there's nothing wrong with the process and that the companies likely got a better deal by staying in-house since the current reinsurance market is fierce.

"If they were overcharging for it, we'd have problems," said Lotane. "Generally, this insurance is less expensive than the worldwide reinsurance market."

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By Stephanie Horvath
Palm Beach Post Staff Writer

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