Consumers who have multi-line policies with State Farm will not be dropped.

Reaction from insurance groups seemed positive. The agreement was immediately praised by the Alliance of American Insurers based in Downers Grove, Ill.

In a joint announcement, Gov. Jim McGreevey and Banking and Insurance Commissioner Holly C. Bakke said the company will work with regulators in New Jersey and its home state of Illinois over the next three years to improve its financial condition.

"Our next goal is to see State Farm Indemnity emerge in the coming years as a symbol of an increasingly competitive marketplace that operates in the best interests of New Jersey consumers." Mr. McGreevey announced.

State Farm Indemnity, had planned to leave the state next year, requiring policyholders to get coverage with other insurers during the course of six months.

Under a Market Stabilization Order signed by Ms. Bakke, the time period for policyholders who are dropped to find another insurer will be increased to two years.

The department said the large majority of State Farm Indemnity policyholders will be renewed as usual until at least the end of 2005, and possibly indefinitely.

Ms. Bakke said while the "Order makes major disruptions much less likely should State Farm Indemnity end up withdrawing in several years, consumers would be better served if conditions improved to the point where national companies returned to New Jersey and State Farm Indemnity was able to remain."

According to the announcement from the governor, State Farm Indemnity President Brian Boyden committed to work with the governor in January and has repeated his commitment to Ms. Bakke "to seriously re-consider the company's withdrawal in three years.'

"This is a time for bringing back stability for both State Farm Indemnity policyholders and policyholders statewide. This will be a time for bringing competition back to the market for the ultimate benefit of consumers," Ms. Bakke said.

The Order specifies several benchmarks for measuring the financial condition of State Farm Indemnity over the course of the next three years. At the end of that period, the company will re-examine its plans and consider remaining in New Jersey. Depending on the pace and extent of improvements, State Farm Indemnity could also decide at an earlier time to discard all plans to exit the market.

If State Farm Indemnity ultimately decides, in late 2005, to proceed with withdrawal, the plan calls for that withdrawal to occur in a measured and orderly manner through 2007 or 2008, depending on the company's financial condition.

Ms. Bakke said the state had moved from a point " when the leaders of State government were either unwilling or incapable of comprehending the crisis that they themselves precipitated by pushing our largest auto insurer to leave the state."

She added that "the damage that was done cannot be repaired over night. But we are getting there. I commend State Farm Indemnity for its willingness to overlook past mistakes and work with us on solutions for New Jersey consumers."

At the end of 2005, the plan states there would be no action on withdrawal until there is re-consideration by State Farm management and its board and the state makes a presentation. If State Farm Indemnity decides to proceed with withdrawal, the company would seek a replacement carrier or carriers until Dec. 31, 2006.

The Alliance, which has member companies that cover approximately one in three New Jersey automobiles, said the order "authorizes an orderly, long-term transition over the next two years that we believe the insurance market will be able to absorb.

"Of particular importance is the fact that motorists being nonrenewed will be selected in a fair and random manner and not automatically dumped into an assigned risk plan."

Deferral of the company's application for withdrawal for three years will give current and future market reforms a chance to take hold, the Alliance said.

The group said its members were encouraged by "the work done by Gov. Jim McGreevey's Administration to stabilize the state's auto insurance marketplace and are hopeful that the plan approved today will avert a crisis in this market."

Ms. Bakke is in the process of reviewing additional reforms, the Alliance noted, and said it believed her changes "will attract new insurers to the state, giving New Jersey motorists additional coverage choices."