Blog: Florida’s two largest private home insurers deemed weak at start of hurricane season

Jun 7, 2011

The following article was published in the South Florida Sun Sentinel on June 7, 2011:

Florida’s largest two private home insurers deemed weak at the start of hurricane season

By Julie Patel

Weiss Ratings, which rates the financial health of companies, reported last week that the state’s two largest private insurers – State Farm Florida and Universal Property & Casualty – are in poor financial shape.

But their parent companies are considered highly profitable.

State Farm and Universal P&C were among 29 Florida insurers considered weak by Weiss, one of the few companies that doesn’t accept payments from the companies it evaluates.

Both insurers had higher ratings from at least one other rating agency.

The Weiss agency’s ratings are based on how much money the insurers have in reserves and their profit margins, risk factors, stability and other issues. Unlike other rating agencies, it doesn’t interact with the companies it rates to obtain detailed information that is not publicly available.

State Farm Florida Insurance made Weiss Ratings’ list of one of the top four weakest large insurers in the state, with a “D” or “weak” rating. Meanwhile, the insurer’s parent company, State Farm Mutual, which received $215 million last year from the Florida subsidiary for reinsurance, made the list of the top four strongest large insurers.

Nationally, the State Farm companies reported a $1.8 billion profit in 2010, more than double the $777 million profit in 2009.

The Florida subsidiary earned $187 million less than it needed in premiums to cover claims and other expenses in 2010 – perhaps due to sinkhole claims, said Gavin Magor, a senior financial analyst with Weiss.

But Magor said Florida insurers haven’t had to pay out claims for hurricanes in recent years but about two-thirds of the home insurance premiums they collect are for windstorm coverage.

“A reasonable question to ask is what happened to the premiums…Where has the money gone to?” he said.

State Farm Spokesman Chris Neal said the problem with Weiss is that it doesn’t have access to the company’s information – other than what’s filed with state regulators. “We actively participate with other rating agencies like AM Best where their analysts have access to our data and have an opportunity to interview our people. That is not the case with Weiss. So, I don’t recognize their numbers and doubt their accuracy, so it would not be appropriate to comment on them,” Neal wrote in an email.

Universal Property & Casualty Insurance, the state’s second largest private insurer, received a shabbier review: “E+” or “very weak.” That’s effectively because the company doesn’t set aside enough money in claims-paying reserves, according to Magor.

A Universal P&C representative declined to comment because the company doesn’t have a position on the ratings. The company has more than $110 million in capital and claims-paying reserves.

The company received permission from regulators to raise rates the past two years without public hearings because each increase was just under the threshold for requiring them: 15 percent. Its parent company, Universal Insurance Holdings, is a publicly traded company that reported a profit of $37 million in 2010, up 29 percent from the year before.

A hefty chunk of the parent company’s revenue last year came from a subsidiary that Universal P&C hires to run day-to-day operations. The subsidiary, called a managing general agent, generated $15 million in revenue, up 7 percent last year and up 16 percent in 2009. Other UIH subsidiaries also generate revenue off Universal P&C policies: two insurance agencies that receive commissions for selling policies and a company that loans policyholders money to pay premiums.

Unlike insurers, their affiliated MGAs are exempt from regulatory restrictions on profit and dividends, and state laws requiring audited financial statements be filed regularly. Critics say payments to the MGAs may be inflated and instead could be used to bolster reserves.
In 2010, UIH’s general and administrative expenses grew to $64 million, up 10 percent in 2010 and 65 percent the year before.

Sean Downes, who is chief operating officer for the insurer and parent, was paid $6.7 million in 2010, including stock awards, benefits and other perks. That’s more than double his $2.5 million compensation in 2009. Chief Executive Officer Bradley Meier’s compensation increased 35 percent to $4.6 million in 2010 from $3.4 million in 2009. That’s more than the amounts earned by 89 percent of their peers at 18 similar insurance companies that Universal’s compensation committee reviewed. The committee reported the pay was justified because Universal’s five-year return to shareholders – stock price increases plus dividends – exceeded that of the other companies.

Meier owns nearly 42 percent of UIH’s common stock. Another 9 percent is owned by Downes.

Universal P&C also paid nearly $1.5 million the past three years to a claims adjusting firm in Deerfield Beach that is owned by Downes’ father.

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