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By Paige St. John

When State Farm stepped up its march out of Florida, it loudly and publicly claimed hurricanes were pushing it toward financial disaster.

The company argued it had to leave the Florida coast — and drop nearly half a million customers — because it could not profit in a state wracked by so many storms.

But State Farm never really left Florida.

A Herald-Tribune investigation finds Florida’s largest insurer has instead found an easier way to profit from homeowners desperate for coverage. And the desperation State Farm helped create allows it to command some of the highest rates in the world.

The conduit for this back-door insurance is DaVinci Reinsurance Ltd., an offshore company with no physical office or employees of its own that sells policies to insurers to cover their storm losses.

The virtual corporation was launched in 2001 by State Farm and a Bermuda reinsurer with which it has close ties.

State Farm provided $200 million in seed capital. Its partner, RenaissanceRe Holdings Ltd., took on management and the recruitment of other investors.

While it has little physical presence, DaVinci is now one of the state’s most important hurricane reinsurers. Contracts show DaVinci provided coverage last year to more than 50 Florida insurance carriers representing the owners of 3.7 million homes.

Through DaVinci, State Farm quietly continues to collect money from thousands of former customers who were told their homes were too risky to insure.

Collectively, these customers have paid hundreds of millions of dollars to State Farm’s offshore reinsurance venture. Without a hurricane, the $300 million in Florida premium paid to DaVinci from 2006 through 2009 has been largely profit. Florida’s payments for 2010 are not yet available.

The advantages to State Farm are clear.

In Florida, the insurance rates State Farm can charge are regulated by the government. Profits are controlled and taxed. The potential loss from a major hurricane is measured in billions of dollars.

DaVinci’s premiums, on the other hand, are as high as the market will bear. Based in Bermuda, it avoids U.S. taxes and faces no limit on profits. If a hurricane strikes, State Farm would lose no more than its investment in DaVinci — $350 million at the end of last year.

State Farm officials would not disclose the company’s current ownership interest in DaVinci. Nor would RenRe release the names of DaVinci’s directors.

Securities filings show that since 2008, State Farm has had an option to leave DaVinci, but as of December 2009 it had not exercised that right.

A spokesman for State Farm responded to questions from the Herald-Tribune with a two-sentence statement.

“Reinsurance exists to help insurers protect homeowners from major catastrophes,” wrote spokesman Phil Supple. “In this instance, State Farm is simply an investor and not actively involved in this reinsurer’s underwriting decisions.”

Stacked against State Farm Mutual’s $92 billion in assets, the investment in DaVinci is small. The cash payout so far has been only $100 million in dividends split between State Farm and other investors, including the Ontario Teachers Pension Fund.

But the impact on Floridians has been huge.

DaVinci helped facilitate the transformation of Florida’s home insurance market into one reliant on thinly capitalized, Florida-based companies and unregulated offshore reinsurance.

DaVinci, along with its partner RenaissanceRe, writes a specialized form of reinsurance that allows investors to launch and operate new Florida insurers with relatively little cash.

“It brings more capacity … I would welcome State Farm to do more of it in a heartbeat,” said Joe Graganella, president of two Florida insurance companies, Capitol Preferred and Southern Fidelity, which buy coverage from DaVinci and RenRe.

Without that protection, it would be hard to do business, Graganella said.

The expansion of DaVinci’s coverage in Florida, however, was also self-serving.

DaVinci’s presence made it easier for State Farm to withdraw from Florida’s densely populated coastlines and in five years shed more than 865,000 customers — by helping give those customers a place to go.

That, in turn, aided State Farm politically.

The company’s withdrawal has put pressure on lawmakers to give concessions to the insurance industry, but is not so cataclysmic as to prompt state intervention to prevent it.

In the end, Florida officials allowed State Farm to sharply raise rates and eliminate policy discounts while shifting to safer parts of the state and retaining its highly profitable auto insurance operation in Florida.

Earnings projections filed with state regulators show State Farm expects to collect as much premium in 2011 as it did before its exodus.

“State Farm has done a good job, an excellent job, in pulling the wool over the eyes of many of my colleagues in the House and Senate,” said state Sen. Mike Fasano, a Pasco County Republican and a critic of State Farm.

“They’ve convinced them that State Farm is poor and they’re losing money and the Legislature is willing to come to their rescue.”


DaVinci emerged from the rubble of the World Trade Center.

Within weeks of the Sept. 11 terrorist attacks in 2001, it was created by State Farm and its Bermuda partner, RenaissanceRe, to capitalize on price increases that followed the disaster.

State Farm’s original $200 million stake gave it a 40 percent share in DaVinci and a seat on the board of directors. RenRe provided 20 percent of the money and manages the venture.

At the outset, DaVinci was a nominal reinsurer for Florida. It specialized in low-risk contracts with large U.S. insurers such as Allstate and Zurich American.

That changed after Hurricane Katrina in 2005.

To take advantage of rising reinsurance rates, DaVinci shifted its attention to hurricane risk, raising $375 million, including $25 million more from State Farm. It doubled its capacity to write reinsurance and refocused much of its business on Florida.

Together, DaVinci and RenRe became the largest provider of hurricane coverage to Florida-based insurers.

The rates they charged Florida insurers post-Katrina doubled, RenRe executives told stock analysts at the time.

The company’s pursuit of such distressed markets is a central part of its business philosophy.

“Where there’s gunfire we don’t run toward the bullets, but we like to get involved when there’s still smoke in the air,” RenRe CEO Neill Currie told the Herald-Tribune two years ago at a reinsurance gathering in Monte Carlo. “It works out pretty well, because we come riding in on the horse.”

National reinsurance records show that in 2005, Florida-only insurers provided 23 percent of DaVinci’s U.S. revenue. By 2009, it was 41 percent.

Interviews and documents examined by the Herald-Tribune show DaVinci focused on selling the riskiest, hardest-to-get coverage most critical to Florida’s weakest property insurers.

There is little competition in that niche, and reinsurance brokers said the price for such protection is among the highest in the world, sometimes more than 50 cents for $1 in coverage.

” ‘Opportunistic’ is the absolute key word,” said John DeMartini, vice president at Towers Watson, a national reinsurance brokerage. “DaVinci cleverly stepped into the void.”

What’s more, State Farm organized its withdrawal in a way that helped it keep control of its most profitable business — car insurance.

It created a list of insurers to which State Farm agents could direct dropped customers. Homeowners who switched to those companies could retain their multi-policy discounts.

State Farm agents also keep their clients if they move them into the state-created Citizens, or to the pre-approved companies — most of which are backed by DaVinci reinsurance coverage.

Details about DaVinci were kept quiet enough that several longtime Florida State Farm agents told the Herald-Tribune they were not aware most of the pre-approved companies had a connection to State Farm.


Tampa resident Trudy Hensley canceled her State Farm home and car policies in 2009 after seeing her premium jump 66 percent in two years.

State Farm’s threat to drop Florida residents angered her enough to look for coverage elsewhere. She switched to Tower Hill.

What she did not know was that the Tower Hill group, including four insurers under that umbrella, is by far DaVinci’s largest Florida customer.

The Tower Hill companies together paid State Farm’s reinsurance venture more than $48 million in premiums from 2004 through 2009.

“It’s very unethical. I have no feelings of Good Neighborliness,” Hensley said. “I’m not happy at all. It’s another case of those big insurance companies taking advantage of people.”

Hensley’s first reaction after being told about DaVinci was to ask for a list of companies that do not buy reinsurance from the company.

It would be hard to find one.

By 2009, DaVinci, in partnership with RenRe, had provided some hurricane protection for 54 Florida insurers, including Allstate and fast-growing Universal Property & Casualty.

The duo supplied the majority of hurricane protection for six companies, a list that included Security First, Argus and the now-defunct Northern Capital.

According to financial contracts reviewed by the Herald-Tribune, DaVinci was the third-largest commercial provider of hurricane reinsurance in Florida by the end of 2009.

As State Farm dropped customers along the Florida coast, many remained in the State Farm family when they were picked up by companies using DaVinci reinsurance, including Northern Capital.

The Miami-based insurer was started in 2007 by the owners of a security guard company. Alexander Anthony and Albert Fernandez put up $8 million and approached state regulators with an offer to take on more than 45,000 homeowners who had been dropped into a state-run program by State Farm and others.

Like many Florida start-up insurers, Northern Capital lacked the money to insure that many homes.

It could have drastically scaled back its growth plans to fit the money it had. Instead, it devoted two-thirds of its income to buy reinsurance, letting it insure thousands more homes.

Northern Capital concentrated its business in Miami-Dade County and adjacent areas — a region State Farm closed to new business in 1992. Despite that, 90 percent of Northern Capital’s private reinsurance in 2007 came from DaVinci and RenRe.

The decision was a fertile opportunity for State Farm’s venture.

Northern Capital paid DaVinci as much as 40 cents for every $1 in protection it received, akin to paying $80,000 a year to insure a $200,000 home.

A risk assessment done for state regulators shows Northern Capital’s coverage from DaVinci had a technical value — the average annual expected hurricane loss — of no more than 4 cents per $1 insured.

But DaVinci demanded to be paid 10 times the actual risk. That cost landed on homeowners.

A Herald-Tribune review of scores of reinsurance contracts found similar terms for other companies.

In 2009, Southern Fidelity paid 52 cents for every $1 of protection bought from DaVinci and RenRe. Homeowners Choice paid the two companies 43 cents per $1 of protection. Capitol Preferred also bought high-risk coverage last year at 57 cents on the dollar; Gulfstream paid 32 cents for every $1 of coverage.

As Northern Capital illustrates, the contracts worked out better for State Farm than for companies that bought the coverage. With no hurricanes, DaVinci kept the $20 million it collected from Northern Capital.

In early 2009, state regulators accused Northern Capital of paying too much for reinsurance and put it under secret supervision.

A year later, the company had so little money regulators shut it down.