Insurers seeking Citizens loans fined

Firms broke rules in plan to push customers to private companies

Article Courtesy of The Palm Beach Post

By Charles Elmore

Published December 11, 2012

Two companies named as potential players in a controversial plan to cash eight-figure checks in exchange for taking Citizens insurance customers have been hit with penalties for not complying with an existing state loan program, records reviewed by The Palm Beach Post show.

Citizens executives say their $350 million proposal to give private insurers loans up to $50 million each from ratepayers’ money would be an innovative, safe way to get private companies to take on up to 350,000 customers from the state’s last-resort property insurer.

But state officials on Friday approved nearly $800,000 in penalties for Tower Hill Signature Insurance Co. of Gainesville because it failed to maintain a minimum $50 million surplus, or cushion to pay claims. That safeguard is required under a taxpayer-funded loan program launched in 2006.

American Integrity Insurance Co. of Tampa was late on a payment and assessed fees.

“These are the last companies we would want to be loaning any money to,” said state Rep. Mike Fasano, R-New Port Richey. He called the $350 million plan a “scam.”

Another question is whether the results of loan programs match advertised benefits. Thirteen companies taking $250 million in 20-year state loans said in 2006 they expected to add 1.7 million customers — from Citizens or elsewhere. But nearly all have fewer total customers in 2012 than they proposed to add. Citizens has grown to 1.5 million customers from 1.2 million in that span.

As the Citizens board prepares to meet Friday, its executives last week told a legislative panel why it makes good sense to spend what amounts to virtually all its projected money left after expenses in 2013, $350 million, as 20-year, potentially forgivable loans to get private insurers to take a big chunk of its 1.5 million customers.

Citizens President Barry Gilway says it has “staggering” potential to reduce the company’s risk exposure.

In September, the state’s Office of Insurance Regulation said four companies had expressed interest in removing policies from Citizens under its proposed “surplus note” program: American Integrity Insurance Co. (50,000 policies), Tower Hill Preferred Insurance Co. (43,250), Tower Hill Select Insurance Co. (38,212) and Tower Hill Signature Insurance Co. (49,825).

For those who took part, complying with the surplus provision of the earlier state program is a requirement for participating in the new plan, Citizens spokeswoman Candace Bunker said Friday.

“Citizens will absolutely not allow any company to participate without being in full compliance,” Bunker said. “This is an ironclad requirement that will not be weakened.”

Citizens received inquiries and an indication of potential interest from several insurers though Tower Hill was the only group that “formally expressed an interest,” Bunker said. The program is modeled so that 350,000 policies would be removed, she said.

Nearly 400,000 Citizens customers are already getting the chance to move to new carriers late this year and early 2013 without loan incentives, the largest potential exodus in at least four years.

Citizens officials proposed moving ahead with the “surplus note” plan to mixed reviews before a House subcommittee last week. Some board members have called for moving ahead with the program, with or without further legislative involvement, by early 2013. One of two outside financial reports on the plan may not be ready until January.

Tower Hill completed its purchase of one of the 13 participants in the 2006 plan, Royal Palm Insurance Co., early in 2011, and renamed it Tower Hill Signature Insurance Co. In 2006, Royal Palm expected to add nearly 145,000 customers with the aid of state loans. Tower Hill Signature had 74,523 customers as of June 30.

The company fell short of the $50 million surplus requirement for three quarters ending June 30 and regulators approved penalities of about $789,000 in higher interest, said Carolyn Morgan, director of property and casualty financial oversight for the state’s Office of Insurance Regulation, in a letter to program administrators Friday.

“As part of the turnaround of this troubled insurer, this company did fall below the minimum requirement of the loan program of $50 million in adjusted surplus,” said Joel Curran, Tower Hill’s chief underwriting officer. At the end of the third quarter, the adjusted surplus was over $48 million and growing, he said.

“Tower Hill’s acquisition, management and infusion of capital is returning the company to profitability and prevented the total bankruptcy of the insurer and the capital build-up loan from being permanently unpaid to the state,” Curran said.

Unlike the state loan program, the Citizens proposal is “designed to attract fiscally sound, proven carriers rather than attract unproven new carriers as the $250 million capital build-up program did,” Curran said.

For its part, American Integrity “consistently and timely repaid over 20 loan payments over the past five years except for one that was inadvertently paid a few days late over a year ago,” company spokeswoman Lisa Miller said. “We have paid the penalty for this oversight.”

American Integrity paid about $7,750 in fees for being late on a payment in October 2011. The company expected to add 149,000 customers in 2006 with the help of $7 million in loans but had 111,662 customers as June 30. Miller said the company policy count has climbed above 150,000 in December thanks to existing programs to take Citizens customers and other moves.

If companies haven’t always met growth projections, a primary reason is that “in many areas in Florida, a private insurance company can’t sell policies as cheap as Florida’s government-run insurance company,” Miller said.

Some companies say the 2006 loan program has achieved useful things, such as requiring companies to match loans with their own money, bringing more private capital to the market. But economic conditions worsened and the playing field changed after the state froze Citizens rates for several years and doubled homeowner credits for storm-resistant features among other moves, they say.

“Each year we lose about 25,000 customers to Citizens and other competitors,” said Roger Desjadon, CEO of Florida Peninsula Insurance Co. of Boca Raton. The state plan was “not at all a failure” in his view, but growth aspirations were “somewhat stymied” by changes in state rules and competition from Citizens and private carriers.

Florida Peninsula matched $25 million in loans and planned to add up to 310,000 customers, according to a 2007 state Board of Administration report. By Desjadon’s count the company did write about 285,000 new policies, though many did not stay. The company had 122,893 customers total in Florida as of June 30, state records show.

At least one insurer, Universal Property & Casualty, appeared to surpass expansion goals of 150,000 customers and grew to 555,000 by mid-2012. But for the vast majority, the net result fell short of projections.

Citizens would offer low-interest, 20-year loans that could be forgiven 20 percent each year a named storm hits Florida. Companies would pledge to keep Citizens customers 10 years and not raise rates more than 10 percent for three years.

Customers could choose to go back to Citizens, however, particularly if new insurers raise their rates substantially after three years.

To help block a revolving door of returning customers, Citizens has proposed that companies must keep or replace customers or face such penalties as higher interest payments or even a demand for full repayment. The fact that Citizens will be in the fourth year of rate hikes up to 10 percent annually may “potentially reduce the gap” between it and private insurers, Bunker said.

Even some legislators who support shrinking Citizens expressed skepticism about the “surplus note” plan last week. Rep. John Wood, R-Haines City, called the plan “frivolous” and said Citizens should focus on finding ways to charge higher rates to push customers to private insurers.

Rep. Frank Artiles, R-Miami and a public adjuster often at odds with insurance companies, said the surplus note idea really benefits a handful of private carriers. On Tuesday, Artiles asked the Florida Office of Insurance Regulation to undertake a “market conduct examination,” a comprehensive regulatory look under the hood, on Tower Hill’s companies.

Citizens officials say the point of all this is to reduce the risk of assessments to all Florida insurance customers if a once-in-100-year storm wipes out Citizens reserves.

But fronting money to private insurers only adds to Florida’s risk if smaller private carriers fail after a once-a-century megastorm and their claims must be covered by a state guarantee fund, Artiles argues. That means Floridians risk the financial consequences both of having the private insurers go bust and seeing loans that divert money from Citizens’ own claims-paying surplus go unpaid, he said.

“If Citizens’ loan program, which looks more like a Christmas present than a genuine incentive program with an ironclad guarantee, is going to move forward— then I’m going to do my part to insure we know the types of companies we are dealing with and understand their business practices,” Artiles said.