Small insurers take on dire cases
But how healthy are the insurers that take out policies that Citizens doesn't want? Many are untested startups.
By HELEN HUNTLEY
Published May 21, 2006
Like bailing out a boat while waves crash over the side, Florida's property insurer of last resort is trying to shrink its customer base.
Each month on average, 40,000 policy applications for homeowners and windstorm insurance come in the front door at Citizens Property Insurance Corp., while 10,000 go out the back door in a program optimistically dubbed "depopulation."
If your policy is one of those transferred, you can bet you won't end up with State Farm.
The big insurance companies are dropping Florida customers, not looking for more. So just how healthy are the companies that are willing to take on policies other companies have rejected?
Healthier than you might imagine, although hardly as financially solid as major insurers such as State Farm and Allstate. Many are untested start-ups who see the takeout program and its incentives as a way to build business. Seven of the 13 companies that have taken policies out of Citizens were first licensed in Florida in 2004 or 2005.
Only one of the takeout companies is in trouble with state regulators. Atlantic Preferred Insurance Co. of Tampa took 113,649 policies out of Citizens, far more than any other company, but two big hurricane seasons turned out to be more than the company could handle.
Hurricane Wilma was the final blow, putting Atlantic Preferred into receivership. It's one of the Poe Financial Group companies the state wants to liquidate, sending its policyholders back to Citizens.
All the rest meet minimum capital requirements, but two, Gulfstream Property and Casualty Insurance Co. of Sarasota and Federated National Insurance Co. of Lauderdale Lakes, were required to submit action plans for improving their capital positions. Gulfstream officials declined to comment, while those at Federated could not be reached.
Claude Mueller, director of property and casualty financial oversight for the state Office of Insurance Regulation, said the Poe companies are the only ones in the state with a capital problem.
"It looks like everybody has gotten the capital they need," he said.
However, Mueller said capital requirements are based on the assumption that insurance companies will be able to get the reinsurance they need at a price they can afford.
Reinsurance is an extra layer of insurance that kicks in when losses soar, as they have during the past two hurricane seasons. The less reinsurance you have, the greater your risk and the more capital you need to cover it. Recently passed legislation makes reinsurance more available to small companies, although some are looking for coverage. Any who haven't found it in the next few weeks could end up being forced into liquidation just as hurricane season gets under way.
It's tough to check the health of takeout companies with A.M. Best Co., the insurance rating agency, because only two of the companies have a rating, both of them minor players in the takeout business.
Service Insurance Co. of Bradenton, which has taken out 457 Citizens policies, ranks at the top of the list with an A- for excellent. Argus Fire & Casualty Insurance Co. of North Miami Beach, gets a C+, for marginal, even though it has a stronger capital position than many other takeout companies.
A.M. Best classifies most of the other companies as too new or too small to be rated, or simply says it doesn't follow them. Two takeout companies - Atlantic Preferred and Federated National - are not rated by A.M. Best at the insurance companies' request.
For a startup insurance company, the takeout program is a way to assemble policies without a sales force or marketing expenses. All a company needs is at least $5-million in capital and an acceptable business plan. The state looks at computer models to determine whether the company has adequate capital for the risks it plans to take.
In most cases, companies get paid for the Citizens policies they take, a bonus of up to 12.5 percent of the annual premium if they keep the policy for at least three years. Under just-passed legislation, the holding period changes to five years and, starting in 2008, the takeout bonus will be a flat $100 per policy.
But some companies have taken policies from Citizens without financial incentives and still think the arrangement is a good deal.
"The hope is that by being smart and disciplined, you can make it," said Dale Hammond, president of the new HomeWise Insurance Co. in Pinellas Park. "If you blindly go in and don't understand what you're taking, you could get into trouble."
Two former Citizens executives were involved in starting HomeWise, but Hammond said they no longer have any affiliation with the company.
He said HomeWise chose to focus on windstorm-only policies as a way to develop underwriting and claims expertise in an area in which there wasn't a lot of competition. Eventually the company would like to expand to other states, he said.
Companies get to select the policies they take out of Citizens, within limits. That allows them to diversify by taking policies from various parts of the state.
"We manage our exposure down to the ZIP code and purchase reinsurance based on those results," said Don Cronin, president of United Property & Casualty Insurance in St. Petersburg. He said takeouts represent about 40 percent of United's customer base.
Some insurers are choosy about the types of properties they'll take.
"Homes built in the '70s, '80s and early '90s are more risky," Hammond said. "They tend not to perform as well in a storm." Some older homes and those built under the stricter building codes after Hurricane Andrew are sturdier, he said.
Since 2003, when the Citizens depopulation program began, more than 500,000 policies have been taken out by private companies. However, Citizens has more than 800,000 policies and is expected to pass State Farm soon to become the largest insurance company in the state.
The pace of takeouts slowed dramatically after Hurricane Katrina. Only 53,555 occurred this year as companies approved to do takeouts held back.
"The biggest factor discouraging takeouts right now is reinsurance," Citizens spokesman Justin Glover said. "Cost and availability are making it difficult for companies."
Hammond at HomeWise agreed.
"We haven't taken out as many policies as we originally planned," he said. "We were very conservative. Now that we've got a better idea of our reinsurance costs and the impact of model changes for calculating risk, we will resume taking policies out of Citizens, probably in November."
Times staff writer Tom Zucco contributed to this report. Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.