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Insurer to take dropped policies

Backed by $65-million in capital, Royal Palm Insurance's founder says his company is on track to be successful where others have failed.

By TOM ZUCCO
Published May 16, 2006

Less than a week after the Florida Legislature passed a bailout of Citizens Property Insurance Corp., and other property insurance reforms, State Farm said it wants to raise rates statewide an average of 71.5 percent and Allstate Floridian said it is dropping 174,000 policyholders, about 17,000 of them in the Tampa Bay area.

State Farm, largest of the property insurers in Florida, joined a growing list of insurance companies seeking a rate hike. But Allstate's shedding of nearly a third of its policies was the bigger of the two shoes to drop.

"We were told that the property and casualty reform bill had to pass if these companies were going to stay in Florida and write new homeowners policies," Rep. Randy Johnson, R-Celebration, and a candidate for the state office of chief financial officer, said in a statement Monday. "Well, it seems the joke is on us. Clearly, this bill did nothing to help Florida families."

But in what may become a blueprint for the private insurance market, Ormond Beach-based Royal Palm Insurance, a newly created insurance company, agreed to take on about 120,000 of the dropped Allstate policies, more than 17,000 of them in the Tampa Bay area.

"I hope Royal Palm has better luck than Poe did,'' said Bill Newton, executive director of the Florida Consumer Action Network, referring to the recent financial failures of the Tampa-based takeout insurer. "I hope they are well-financed enough to be able to do business in the market and not leave people stranded because we need new players.''

The Florida Office of Insurance Regulation doesn't think that will happen.

"We approved their plan of operation,'' said OIR spokesman Bob Lotane. "And in OIR's eyes, they're exceptionally well capitalized as a new company and they have a very well-founded business plan.''

But the fact remains that Royal Palm is going where few other insurers are willing to tread.

In an interview Monday, Locke Burt, Royal Palm's founder and president, explained how and why his company is taking on policies Allstate doesn't want.

Burt served in the Florida Senate from 1991 to 2002, the year he ran unsuccessfully for attorney general against the eventual winner, Charlie Crist.

How did the events unfold?

In March, 2005, I started a little insurance company called Security First and we took a few policies out of Citizens. Then last May, we started talking to Allstate about how to produce more business through their agency plan.

Those discussions evolved through the fall, until they said, "Look, what about taking a substantial book of business?"

The more we talked, the more it became a logical idea to set up a separate company. So we decided to commit $65-million to start Royal Palm. To be a source of capacity for the customers of Allstate.

Most policyholders dropped by Allstate would have probably ended up in Citizens, which is required by law to charge the highest rates in the state. Still, Royal Palm won't start writing those dropped policies until Nov. 1. What happens then, and who will be responsible for adjusting their claims, which was a major problem for Citizens?

After Nov. 1, about 10,000 policyholders a month will be offered the opportunity to have a Royal Palm policy. They can say yes or no. Those who say yes will be served by Royal Palm adjusters.

Last year it was very difficult to get adjusters for all companies. A lot of them were in Louisiana adjusting Katrina claims. Citizens had a little more difficulty than the private market, and we hope to be able to provide better service than Citizens. And have lower rates than Citizens.

How much lower?

There's going to be big variation in our rates. The difference depends on the age of your home. Hurricanes have demonstrated homes built under the new codes do considerably better than older homes. Royal Palm rates will reflect that. People in newer homes will pay less than those in older homes.

But we will also inspect every risk. It's going to take three years to do it, at about 3,000 inspections a month.

So for any individual customer, it will vary a lot. But Allstate is going to be asking for another rate increase in September or October, so when we start issuing policies in November, they won't be much different from other companies.

How will you succeed in an area where most other insurers won't even venture?

Most takeout companies start with $6.5-million in capital. We're starting with $65-million. And we've purchased significant reinsurance.

We think we will be more financially secure than a lot of the other little companies in Florida. We're going to be fourth or fifth largest in terms of capital.

When Security First started last year, we had about 15,000 policies, a lot of them in St. Petersburg. That's one of our larger areas because other private insurers are scared of sinkholes. But there are no sinkholes in St. Pete.

It's been said that taking on policies other insurers don't want is like adopting a juvenile delinquent. Is that accurate?

I've been in the reinsurance business since 1974, and the biggest expense of running a property insurance company in Florida is reinsurance. That's why the state has problems. We expect to spend 45 cents of every premium dollar on reinsurance.

I'm well-known in the reinsurance business, and buying good reinsurance is one of the keys to financial success. That's one advantage Royal Palm has that other companies don't have.

The second advantage is that in the old days, Allstate or State Farm or some other company appointed an agent and said, "Go write business."

When (Hurricane) Andrew struck in 1992, that was a bad idea. So another key to having a reasonable chance of making it is to spread your business around the state.

We have every risk put into a computer, geo-coded by latitude and longitude. We know where every risk is and we tell the agents where to write.

Allstate and State Farm didn't have a chance to do that. So what they're doing is analyzing books and seeing areas of state where they're overexposed. They said to us, "Here's 200,000 risks. Which ones would you like to have?"

So you're able to sleep well at night?

Well, writing property business is still very dangerous. A lot of people (at other companies) believe you can never make money long term in Florida.

And there's this new thing called the SST - sea surface temperature. Right now, its very hot. It's warm enough today, the 15th of May, to support a Category 4 hurricane in the Caribbean or Category 3 storm in the Gulf.

But we think we have a good business plan, we have adequate rates that reflect the risk, and a good reinsurance program we bought in April.

And because we're not a publicly held company, we can take a financial hit which a public company like Allstate would have trouble with. The stock market does not like volatile earnings.

What's your solution to Florida's insurance crisis?

It's not what anybody wants to hear. What you have to do is get people to pay their fair share of the risk. The Legislature can't control the number of hurricanes or where they hit or how much damage they do.

The only thing the Legislature can do is determine who pays and when, and traditionally, it's been a tremendous subsidy that has flowed from north Florida to South Florida and from the center of the state to the coast.

We're not going to change the cost of insurance, but we can decide who pays and when.

Does your company plan to take on more policies from Allstate or other insurers?

We hope to make Royal Palm a major insurer in Florida, and I still believe that if you do it right, you have an opportunity to have a responsible business.

That means spreading risk statewide, having adequate rates and buying good reinsurance.

If the wind doesn't blow, we'll be heroes. If it blows four more times, we'll be goats.

Times staff writer Helen Huntley contributed to this report. Tom Zucco can be reached at zucco@sptimes.com or (727) 893-8247.

EX-ALLSTATE POLICIES IN BAY AREA

Property insurance policies in the Tampa Bay area that were dropped by Allstate and are eligible to be picked up by Royal Palm:

Pinellas 8,520

Hillsborough 1,906

Pasco 2,247

Hernando 2,092

Citrus 2,864

[Last modified May 16, 2006, 06:39:04]