Property insurers battered despite no storms

After four hurricane-free years in South Florida, insurance companies should have been raking in the profits. All that premium money pouring in — and no big catastrophe claims checks going out.

Not so. Most of the state’s insurance companies report they are losing money. If the numbers are valid, the next big storm could not only destroy your home but also the company that insures it.

Based on insurers’ 2009 annual reports, 50 of out 70 Florida-based companies posted losses on their insurance business for the year; 31 of the companies reported a drop in reserves — the money insurers set aside to pay claims.

These Florida-based companies, many of them small, write about 52 percent of the residential homeowners insurance in the state. The rest is written by Citizens Property Insurance, the state-run company, State Farm Florida Insurance, the largest private carrier and several dozen companies based outside of Florida.

The dreary financial reports coincide with a push in Tallahassee to pass legislation that would free up insurance companies to raise their rates at will — as much as 5 percent initially and as much as 15 percent in the future. Right now, any rate increase requires state approval.

Some are puzzled at how insurers can be doing so poorly during a time when hurricanes have bypassed Florida.

“Our insurance companies ought to be making good profits,” said Alex Sink, the state’s chief financial officer and a candidate for governor. Sink has asked Insurance Commissioner Kevin McCarty for a status report on the financial health of Florida-based insurers. It’s due Wednesday.

The companies aren’t alone in issuing dire warnings about the industry.

Demotech, a Columbus, Ohio,-based rating agency, withdrew positive ratings on 10 Florida companies over the past year, including Magnolia Insurance, Edison Insurance and two insurers operated by Northern Capital Group.

A.M. Best, another rating agency, downgraded five Florida-based insurers — different ones — because they didn’t meet capitalization or other requirements.

And yet, in a move likely to fuel skepticism about insurance company losses, one company, Southern Oak, was just slapped by the state for overpaying a sister company to perform routine paperwork, pay agents and resolve claims.

It made Southern Oak’ bottom line look worse than it actually was.

If insurance companies are as bad off as they say they are, South Florida residents are especially at risk. In Miami-Dade, Broward and Palm Beach Counties, about 776,404 — nearly 55 percent of the 1.4 million insured homes — are covered by smaller firms that collect less than $200 million in annual premiums.

WHAT INSURERS SAYIf a homeowner’s insurer goes belly up, the state’s guaranty fund will pay up to $500,000 — which might not cover all of the homeowner’s losses. Those payments could result in additional taxes for Floridians if the guaranty fund runs out of money to pay losses and needs to raise more.

Insurers say they have been left vulnerable by a combination of factors, including:

• The state’s determination to hit the brakes on rate increases. Numerous rate hike requests have been whittled down or rejected.

• The rise in the cost of “reinsurance” — backup insurance that companies buy to limit their exposure in the event of a disaster.

• The state’s schedule of wind mitigation discounts, which grants major rate cuts to homeowners who buy shutters and pay for other improvements to make their homes more hurricane-ready. Companies complain that the discounts are overly generous.

• The reopening of Hurricane Wilma claims as policyholders put in for additional losses — often at the insistance of public adjusters, who represent homeowners.

• As in the case of Southern Oak, the payment of overly-generous commissions to affiliated companies that drain revenue from the insurer and leave it with little income or sometimes even losses.

Regulators and lawmakers have started to focus on this last problem.

Last week, Rep. Alan Hays called for an investigation, noting some company executives are paid big bonuses and generous commissions go to sister companies at the same the insurer is agitating for higher rates.

Some remedies are emerging in Tallahassee. One is a massive insurance bill that would require each property insurer operating in Florida to boost its reserves to $15 million; the current requirement: just $4 million.

It would also allow insurers to increase rates to offset those mitigation credits. While good for insurance companies, that would cost homeowners big money.

Meantime, for the first time in three years, rate hikes are winning approval from the state. Over the past 10 months, regulators have OK’d 75 rate increases — some for more than 20 percent — for insurers selling home and windstorm coverage. Insurers say it’s not enough and that still higher increases are needed so companies can sock away revenue to pay future claims.

A 14 PERCENT INCREASE

The state’s largest insurer State Farm, which won a 14.9 percent rate increase last year, says it had an underwriting loss of $463.9 million in 2009. In conjunction with the rate hike, the company got permission to drop 125,000 Florida policies.

State Farm and other Florida insurers say they have been undermined by a 2007 law that required insurers to lower rates if they purchased reinsurance from the state’s catastrophe fund at lower than the going rate in the private market. Savings had to be passed on.

The same 2007 law froze the rates charged by Citizens Property Insurance, the state-run insurer, through 2009 and freed the company to compete head-on with private carriers. Locking in the rates at Citizens put the private insurers at a disadvantage, those companies say.

There was a time when Citizens was mandated to have the highest rates. No longer.

John Rollins, who runs Rollins Actuarial Services in Newberry, Fla., says traditionally insurers will build up their reserves in years when hurricanes veer away from Florida. He contends flat rates have prevented that from happening.

According to Rollins, 40 cents out of every $1 of premium collected by Florida property insurers is spent on backup insurance; 25 cents is spent on non-catastrophe claims such as fire and theft; and another 30 cents covers underwriting expenses, which include the cost of servicing claims, agents’ commissions, administrative costs and premium taxes.

WHAT’S LEFT OVERThat leaves about five cents profit for an insurer that can run efficiently and contain its expenses.

“The average company isn’t achieving [that five-cent profit] because it can’t charge a premium large enough to cover all those costs,” he says.

Southern Oaks, the company ordered to slash what it pays to the sister company — called a managing general agent — is not the only insurer facing closer scrutiny these days. Several are being examined, said a spokesman for the Office of Insurance Regulation. The office would not identify those companies.

Not everyone is down on selling insurance in Florida.

American Integrity, a company based in Tampa, and New York based-Privileged Underwriters Reciprocal Exchange have added capital in the past 12 months and are poised to grow.

Robert Ritchie, American Integrity’s president, says the company will be writing new policies throughout the state and is interested in taking over some of the 125,000 policies State Farm won’t be renewing in the next 12 months.

American Integrity won approval for a 14.8 percent rate hike in late 2009.

“I’m not happy that homeowners will see rate increases,” says Ritchie. “[But] we need to do a better job overall explaining the need for rate increases and why the pain is being felt this year when actually it has been building over the past three years.”