Takeout companies replacing Citizens

Mar 24, 2008

Daytona Beach News-Journal–March 22, 2008
Business Writer

DAYTONA BEACH — Jean Minerd knows a bit about homeowners’ insurance: Her big, 100-year-old Beach Street house took a beating during the 2004 hurricanes, and the ensuing agony gave her an unwanted education.

So, when she was notified her insurance coverage could be switched from Citizens Property Insurance Corp. to a small, privately owned company, Minerd might have had reason to be reluctant. If she did not formally object, the notification letter told her, the change would be automatic.

In fact, Minerd never bothered to protest or investigate, and instead let the change go through as of March 4. Her house is now covered by Southern Oak Insurance, a small, 4-year-old, Jacksonville-based company, instead of by the state-backed Citizens.

"I really didn’t know what difference it made," Minerd said.

For one thing, she never got a promise of a rate cut and expected to continue to pay the same $3,000 a year in premiums that Citizens collected.

Minerd said she has the house up for sale. "I thought it would be good to get away from the Citizens name," she said. "It’s kind of the insurance company of last resort."

In permitting the switch to go ahead, Minerd joined hundreds of thousands of Florida homeowners, including many in the Volusia-Flagler area, who either have been shifted during the past few years from Citizens coverage to private insurers or who are being asked this year to permit a change.

Is such a handoff to a private-sector insurer — what the industry and the OIR call a "takeout" — a good thing?

The answer to that crucial question is very much a matter of debate among various insurers, insurance agents and state officials. The final answer may not be known until a major disaster blows through the state. Only then would the "takeout" companies — many of them quite young — be tested. First, of course, is their financial wherewithal to cover big losses. Also at issue is their experience and logistical abilities to conduct the damage evaluations and "adjustment" that would be needed if a massive number of claims was made in the case of a major hurricane.

But many agents have resisted takeouts, some arguing that many of the companies lined up to take over tens of thousands of policies may not be financially up to the risks involved. At Brown & Brown Inc., a national insurance agency based in Daytona Beach, Jim W. Henderson, vice chairman and chief operating officer, said his company normally does not write insurance policies for companies rated less than A by A.M. Best, the premier rating agency. However, it has made exceptions, he said.

"The takeout companies are really thinly capitalized," Henderson said. "Some of them are capitalized in a manner that does not achieve an A.M. Best rating for us to do business with them."

He cited the biggest insurance insolvency in Florida history as a warning. Poe Financial Group, a Tampa umbrella company of three insurers, scooped up policies from Citizens’ state-backed predecessor after bigger insurance companies fled the state in the wake of Hurricane Andrew in 1992. The storms of 2004 and 2005 overtaxed the Poe companies. They were liquidated and Poe Financial filed for Chapter 11 bankruptcy protection in 2006 with hundreds of millions of dollars in unpaid claims. Florida policyholders are still paying a surcharge on their premiums to pay off some of those losses.

Such a disaster could happen again, Henderson said. "That event is one we prefer not to be involved in."

At Citizens, shedding as many policies as possible is a goal enshrined in state law. "We have been charged to try to depopulate" Citizens’ portfolio of policies, said Christine Turner, a spokeswoman for the insurer.

Likewise, at the state Office of Insurance Regulation, trimming Citizens’ portfolio is so important that Commissioner Kevin McCarty recently ordered Citizens to inform any consumer whose agent had turned down a takeout offer. Until the order takes effect May 1, agents have been free to simply refuse the offer of a takeout and never let the consumer know an offer had been made, McCarty said in a written statement accompanying the order.

McCarty cast the issue in terms of consumer choice. "Thousands of Citizens’ policyholders who may have been kept in the dark under the old process now will have the opportunity to decide for themselves if they wish to be removed from Citizens and placed with a private insurer," he said in a written statement.

McCarty’s office conducts regular reviews of the financials of the 10 companies currently poised to take policies from Citizens this year and found them to be solvent.

As for Minerd, she said she was surprised by a $440 reduction in her annual premium when Southern Oak took over her coverage.

The chief executive of Southern Oak, Tony Loughman, said his company is not rated by A.M. Best but is rated A prime by another rating company, Demotech Inc. Also, Loughman said, Southern Oak is sufficiently capitalized to bear the risk it is taking on and has adequate reinsurance, a kind of insurance for insurance companies in the case of major disasters.