Jan. 27 (Bloomberg) -- State Farm Mutual Automobile Insurance Co., the largest home insurer in the U.S., plans to drop 1.2 million customers and leave Florida’s residential market after state regulators denied a request to raise prices.

The insurer cited risks from hurricanes and the rising cost of everyday claims submitted by the state’s homeowners in an e- mailed statement today. Surplus funds held by State Farm’s Florida unit fell by $201 million, or 24 percent, in the first three quarters of 2008, a period when no hurricanes hit the state, said Jeff McCollum, a spokesman for the Bloomington, Illinois-based insurer.

An increasing number of Florida homeowners are relying on insurers with lower claims-paying reserves. The two largest U.S. residential insurers, State Farm and Allstate Corp., scaled back following record storm seasons in 2004 and 2005. Florida’s largest insurer is now a state-run company that would have to borrow money to meet obligations if a major hurricane were to hit, Fitch Ratings said in a report last year.

“We regret the impact this will have on our customers, employees and agents,” Jim Thompson, the president of State Farm’s operations in the state, said in the statement. “Faced with steeply declining resources to cover future claims and expenses, State Farm Florida has little choice.”

The insurer filed a plan with regulators to drop home customers over a two-year span after the surplus at its Florida unit dropped in the nine months ending Sept. 30. The insurer lent $750 million to its Florida subsidiary after a series of storms in 2004 that the subsidiary was never able to repay, the company said today. Under the plan filed today, the insurer proposes continuing to offer car, health and life insurance.

Allstate

Allstate, based in Northbrook, Illinois, last year reversed its four-year-old policy of not accepting new Florida homeowners, saying it would take on some new policyholders as part of a settlement with the state insurance commissioner, Kevin McCarty.

McCarty has 90 days to review State Farm’s plan to ensure it complies with state law. If approved, the insurer must then provide 180 days notice before any policyholders can be “non- renewed,” or denied a new policy when coverage expires, the commissioner said in a statement.

“We will carefully review State Farm’s intended plans to ensure that they are in compliance with Florida law, and we will explore all legal options as well,” McCarty said.

The commissioner’s office will review whether State Farm is complying with a law governing car insurers that don’t sell coverage of homes in the state and another that requires companies to make adequate provisions before dropping policyholders, said Ed Domansky, a spokesman for the commissioner.

No Conclusions

“Because we just received State Farm’s plan today, we haven’t fully arrived at a conclusion as to whether they are complying,” said Domansky. “That may be something that’s decided by the court.”

State Farm’s move follows a ruling by an administrative law judge this month that denied the insurer a 47 percent rate increase on home policies.

Twenty-five percent of the coastal property in U.S. hurricane zones in located in Florida. A major hurricane may cause more than $100 billion in insured damage if it hits Miami directly, according to models by Boston-based AIR Worldwide Corp.

Hurricane Katrina, the costliest natural disaster in U.S. history, caused $41.1 billion in insured losses after striking the Gulf Coast in 2005.

The state’s elected officials in 2007 attempted to encourage private insurers to expand the number of customers they cover by offering backup protection at below-market rates. State Farm that year lowered its rates by 9 percent as a result of the law and hasn’t won a rate increase since.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: January 27, 2009 16:30 EST