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With State Farm Florida Insurance Co. exiting the state, Florida Insurance Commissioner Kevin McCarty wants anyone who will listen to believe everything's fine.
So much so, the commissioner supported the governor's veto of the Consumer Choice Act insurance bill, much to the chagrin of the bill's sponsors and the 86% of legislators who voted for it. The sponsors are considering a veto override.
The bill would have allowed about 40 bigger, better capitalized companies freedom to set their own rates under specified conditions. Consumers would have more choices.
In support of the veto, and as his evidence of a growing and vibrant property insurance market, McCarty points to his list showing $4.2 billion of new capital from 40 companies added to the Florida homeowners' property insurance market since Jan. 1, 2007.
The list needs a huge asterisk.
Close examination shows only $208 million — 5% of the claimed amount — is new capital from only 11 companies actually writing homeowners or mobile home policies. And $40.5 million of that small total comes from taxpayers through a state loan program.
In other words, the state's homeowners insurance market is nowhere near as healthy as top state officials claim.
'Emerging revelations'
The Business Review's assessment of the 40 companies on the list provided by the Office of Insurance Regulation shows 92% of the capital, $3.8 billion, comes from little regulated surplus lines carriers.
Such carriers do not provide insurance to average Florida homeowners, but instead insure high-risk commercial and industrial properties, waterfront condominiums and others for which property insurance cannot be obtained conventionally.
Many of these new companies are not writing homeowners or mobile-home insurance. A spokesman for Main Street America Protection says the company has no plans to do so, either.
On top of this, insurance agency executives have told the Business Review they have serious concerns about the financial stability of the new capital companies and their ability to service claims despite most of them having “A” ratings from either A.M. Best or Demotech, two major ratings agencies.
In his May letter to McCarty, state Sen. Mike Bennett, R-Bradenton, states that the 40 companies McCarty is touting “are nothing more than the second coming of the now defunct 'Poe Insurance Group.'”
Bennett has called on Gov. Charlie Crist to fire McCarty. And in a joint statement from Bennett and Rep. Bill Proctor, R-St. Augustine, they call on McCarty to explain how the state will insure payment of claims should a hurricane strike a major city with insured losses of $50 billion to $100 billion.
In a July 1 letter to Crist, Proctor refers to what he calls “emerging revelations” that the capital added by these companies is not as advertised, writing, “... I am wondering whether this disturbing information was available at the time the decision was made to veto the consumer choice bill.”
Proctor says he has not yet received a response from the governor.
Now more keenly aware of the phantom capital, Proctor says, “I'm curious how many are bonafide insurance companies and how many are investment companies. It's something I'm going to look at.”
More camouflage
McCarty's office has gone a step further to bolster the numbers. A new spreadsheet sent to the Business Review adds in 2006 figures from 14 more insurance companies. Those companies entered the market for homeowners or commercial residential that year — what McCarty's office says is another $1 billion in new capital — raising the total new capital figure to $4.95 billion.
But the January 2007 date had been the starting period for new companies because that was when major rate reductions occurred that are driving companies such as State Farm out of the state.
What's more, an examination of the 2006 numbers also reveals more number-massaging.
One company, for instance, accounts for nearly 70% of the $785 million of new capital attributable to 11 homeowners' policy companies, but it only writes 1% of this group's policies. Another $156 million of capital comes from two surplus-line companies, which typically do not write homeowners' policies.
And a company listed as writing homeowners policies was misclassified. Instead, the company's true line of business is commercial residential (apartments, condos and dormitories). By being misclassified, American Capital
Assurance Corp. inflated the homeowners list by $49 million.
An examination of the other 18 companies classified as either homeowners/commercial residential, commercial/commercial residential or commercial/residential, only one was found to be writing policies tied to dwelling units.
But that company, American Coastal Insurance, shows a 2008 year-end policy count of 1,474 — not enough to register more than 0.0% in the state's list of 5.1 million residential policies.
Five other companies in the list of 54 are classified as commercial lines of business and account for $1.13 billion, nearly a quarter of the $4.95 billion combined total for the two years.
In sum, of the 54 companies touted as new property insurers since 2006, only 11 of those brought new capital into the market to write homeowners or mobile-homes policies. And these 11 account for only $208 million of new capital.
McCarty did not respond to requests for comment for this story.
McCarty's office points out that there are 210 companies writing property insurance in Florida. What it doesn't say is that the vast majority of these companies are tiny to insignificant players. Two companies — State Farm Florida and Universal Property and Casualty — account for nearly 27% of the policies and nearly 25% of the almost $7.2 billion of premium written statewide.
And State Farm is leaving.
'Falling off the cliff'
Also deserving an asterisk is the $40.5 million, 20% of the $208 million of capital, courtesy of state loans for three of the 11 companies.
In 2006, seeing a need to encourage more residential property insurance covering the risk of hurricanes and to hold down premium increases in the state, the Legislature created the Insurance Capital Build-Up Incentive Program.
This $250 million program provides capital for 13 companies in the form of loans called surplus notes. State rules say the notes are to be considered assets of the insurance companies, not liabilities, even though they are loans.
The companies pay only interest for the first three years.
A big concern is that companies receiving the incentive are required to take on a minimum of $2 of net written premium for each dollar of policyholders' surplus (assets less liabilities) — double the rule of thumb for industry writing ratios and triple the average over the last 50 years.
So these companies are being required by the state to take on more and riskier policies — policies coming from the state's Citizens Property Insurance Corp., State Farm or others reducing their property and casualty exposure.
The accompanying table shows several companies with net premium-to-policyholders' surplus ratios exceeding 300% (more than 3-to-1). Experts say those with high ratings may be paying more for reinsurance or have other backstop financing arrangements.
But rather than take on more risk with more policies, 11 of the 13 companies chose instead to pay what are called “falling off the cliff” penalties of 4.5% on their notes when they fall below a 1.5-to-1 ratio of net premiums-to-surplus. (Net premium is essentially gross premium less reinsurance costs.)
The 11 companies have incurred that 4.5% fine 42 times in the past two years, suggesting these companies would rather be fined than take on the extra risk of the higher ratio.
In fact, three of the new companies that started with state funding have written only 26% of the policies they estimated they would when they applied for the notes.
“A regular banker probably wouldn't have made any of these loans,” says Jack Nicholson, the state's chief operating officer of the Florida Hurricane Catastrophe (CAT) Fund.
Nicholson says it's too soon to decide the outcome of the incentive program, he is pessimistic. “It's not quite as effective as it's been anticipated to be, and other things may hamper it in the future,” he says.
No appetite for Florida
State Farm Florida Insurance President Jim Thompson knows where his company is going after learning in late June that Crist had vetoed the Consumer Choice Act and that the company's financial strength rating had been downgraded to B (Fair) from B+ (Good) by A.M. Best. The company's outlook was also downgraded to negative from stable.
State Farm Florida is far and away the number one residential property insurer in the state with 17.7% of residential policies and 21.9% of homeowners' policies.
In a June 25 letter addressed to Proctor and Bennett, Thompson writes, “Unfortunately, State Farm Florida must continue with its plan to discontinue its property insurance lines in the state ... Net worth for State Farm Florida has declined by approximately $200 million since it first requested its rate increase less than one year ago, and the state has blocked the company's efforts to reverse its rapidly deteriorating financial condition.”
In the letter, Thompson comments on Crist's veto, writing, “... the bill would have attracted more capital to the state — capital that's sorely needed to help protect homes and other property in Florida when the next hurricane hits our state.”
According to Nicholson, a Category 3 storm hits Florida an average of once every three years. With no major storms the last two years, we're due.
Jeff Grady, president of the Florida Association of Insurance Agents, agrees that the state is not telling the whole story about the new companies. He says, “Every single one of them has a very limited appetite for coastal exposure. Most got started by taking out Citizens' policies that were coastal, so they're trying to balance their books with less coastal exposure.”
Grady and the agents he represents are also worried about being sued if these companies go under — which he thinks is a possibility.
But so far the governor and the insurance commissioner aren't listening. Their hurricane strategy is obvious: It's the Katrina model — when in need, go begging to Washington.
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