No hurricanes, just bigger insurance bills

Article Courtesy of The Herald-Tribune

By Paige St. John
Published December 28, 2010


More than 4 million Florida homeowners, battered by property insurance rate hikes and disappearing coverage, are about to get hit again.


State regulators have approved $718 million in rate increases -- despite five years of no hurricanes. They will widen an already $20 billion gap between what Florida consumers this decade paid for protection and what insurers returned by way of claims checks.

Florida insurers continue to claim they are losing money -- the top 20 carriers reported losing $111 million the first half of the year after big payments to reinsurers for hurricane protection -- but the Herald-Tribune found those figures also hide profits.

Payments to affiliated companies continue to tack on hundreds of dollars to the individual bills of homeowners, charges a consumer advocate says are inflated. Most Florida insurers need not publicly report those profits, but two that do posted earnings of $32 million despite telling state regulators their insurance operations lost $16 million and required double-digit rate hikes.

The remains of a condo complex washed away by Hurricane Dennis in Destin in July 2005.


Most of the rate increases were approved behind closed doors, as insurers avoided triggering public hearings required for increases of 15 percent or more, and regulators granted increases higher than that anyway.


The rate increases will not be applied evenly, and many coastal residents will see increases of 20 to 50 percent -- a difficult proposition in a sour economy.



Two big expenses account for the bulk of what Florida homeowners pay for property insurance:


Reinsurance companies write insurance for property insurance companies. They are the lifeblood for scores of Florida's undercapitalized, highly leveraged insurers. Most carriers could not remain in business without these costly reinsurance policies to cover hurricane losses.

Florida's dependence on hurricane protection from the offshore reinsurance market has grown dramatically.

In 2009, that reinsurance cost Floridians $4 billion, nearly 60 percent of their bill and three times more than it was in 2004.

Essentially captive customers, Florida insurers have little control over this cost. Reinsurers seek to restrict supplies to support higher prices.

Consumers insured by small or weak companies pay the most. After half a dozen Florida carriers failed in 2010, reinsurers raised the price of protection for those they consider at risk of collapse.


Almost all Florida-based insurers divide their companies into multiple subsidiaries that bill one another for services ranging from management to reinsurance.

Such payments allow the insurance company to declare a loss while its unregulated management firm and holding company enjoy profits.

Because of this practice, operating expenses charged by Florida insurance carriers account, on average, for as much as one third of a homeowner's premium. A never-released report by the Insurance Consumer Advocate's office shows Floridians on average pay $150 more per policy in overhead costs than Americans elsewhere.

State regulators approve the management contracts, but legislation to require insurers to publicly disclose the finances of their related ventures was killed in the 2010 session.

"It is part of the job loss crisis," said Michele Ladig, a real estate agent in Venice. "As a Realtor, I must tell each potential new resident of the insurance rates, and frankly for many the costs sway them to NOT relocate, or many to move away."

Among the hardest hit will be nearly 173,000 State Farm customers promised discounts for using storm shutters or other protective features on their homes. State Farm has targeted those policyholders for an average 21 percent hike. The company does not plan to raise rates on its other customers.

The return of double-digit rate hikes marks a new and painful phase in Florida's struggle with hurricane risk. Since 2005, more than 2 million Florida families have been dropped by their carriers.

The average statewide premium since 2005 has increased 44 percent. In coastal regions, rates have doubled and tripled.

After five hurricane seasons without a storm, many homeowners expected relief from the higher bills that followed the busy 2004 and 2005 seasons.

A Herald-Tribune analysis of financial filings by nearly 200 property carriers operating in Florida support that expectation. Since 1998, Florida insurers have collected $20.5 billion more than they paid back in claims, $18 billion of that since 2005.

Yet the industry still says it is losing money.

Last month, Insurance Commissioner Kevin McCarty told Florida officials that the market remains in a slump, with 58 percent of carriers reporting losses.

When seeking rate increases over the past year, insurers have cited sinkhole losses, mitigation discounts and increasing expenses for reinsurance, which is the coverage they buy from unregulated corporations that agree to pay their hurricane losses.

Rate hikes have been approved for all those reasons and more.

Florida's government-run Citizens Property Insurance, under political pressure to raise rates, was granted $146 million this year.

The largest increase to a for-profit carrier was $88 million approved this month for Universal Property & Casualty. The company told regulators it intends to come back soon for more.

State Farm hired an engineering firm to show that state-mandated discounts for storm shutters are set too high. Its most recent rate hike is expected to generate $73 million in new revenue on top of a 29 percent rate increase last year. The current increase, an average 21 percent, applies only to State Farm customers with mitigation discounts.


The insurance industry and its advocates say the increases are the result of nearly three years of government attempts to control rates.


"When you charge artificially suppressed rates, it creates water behind the dam," said former House insurance chairman Don Brown, an ardent supporter of rate deregulation and consultant to Gov.-elect Rick Scott. "It continues to pile up."


The industry has renewed its push this year for laws to expand automatic rate hikes, reduce sinkhole coverage and allow insurers to limit loss payments -- all resulting in increased costs to policyholders.

No public hearings

The primary forces draining large amounts of Florida premium -- the increasing reliance on reinsurance and outsized management fees -- remain unaddressed.

HomeWise and its related venture, HomeWise Preferred, exemplify the thin ice on which many Florida insurers now skate.

The Tampa-based companies reported an expected $199 million in premiums this year from 141,000 policyholders.

But after paying $60 million in claims during the first nine months of the year, the companies' capital surplus dropped by a third, to $22 million. HomeWise Preferred barely met the state's $5 million minimum capital requirement.

Regulators last spring approved a 29 percent rate hike -- almost twice what HomeWise had sought. Premiums will go up as much as 50 percent in some coastal areas and 38 percent in Manatee County.

Financial statements show reinsurance and management fees are the biggest drains on the companies' finances. Nearly half of customer premiums go to buy reinsurance -- more than $85 million in 2009. Another $50 million was paid to affiliates owned by HomeWise's parent corporation.

But those big bills were not the problem, said HomeWise president Dale Hammond.

He blamed the companies' need for dramatic rate hikes on everyday losses, from water leaks to house fires.

After paying for hurricane protection, the insurance company has very little left to absorb year-to-year shifts in losses, Hammond said.

"You don't have that cushion to protect you," he said. "Frankly, we would have been better off with a hurricane."

That's because hurricane damage is -- thanks to reinsurance -- the one bill HomeWise would not have to pay from its own surplus.

HomeWise's $37 million increase, the third-largest in the state, was one of eight large increases Florida regulators approved without holding a legally required public hearing.

Hammond said he filed his request for 14.8 percent not to avoid a public hearing (required at 15 percent) but to have the greatest chance of securing fast approval.

He said it was regulators' decision to approve double that.

Seven other companies similarly were granted rate increases over 15 percent without triggering televised public hearings and potential objections from the state's Insurance Consumer Advocate.

Office of Insurance Regulation spokesman Jack McDermott did not respond to repeated requests, including written questions, to explain why there were no hearings.

Insurance Consumer Advocate Terry Butler said the law required them.

"If OIR recommends that an insurer increase rates higher than the original filing and the insurer agrees, the insurer has to adjust its rate filing and re-file it," Butler said. If the result is over 15 percent, he said, "there should be a public hearing."

The truth about profits

The losses cited by many insurance companies have not stopped them from realizing profits for owners and investors.

A Herald-Tribune review of U.S. Securities and Exchange Commission filings found several companies that told investors they were profitable while telling state insurance regulators the opposite.

Universal Property and Casualty declared $11.3 million in insurance losses for its insurance company subsidiary.

But after adding back in the money Universal pays itself for management services, the company told stockholders in SEC filings that it made $29 million before taxes the first half of 2010. The holding company was still posting profits in November when its insurance carrier asked regulators for a 14.9 percent hike.

Homeowners Choice similarly declared a $4.8 million loss as of June 30, but SEC documents show it told investors its holding company made a $3.2 million pre-tax profit.

Both were granted rate hikes.

Because of such in-house transactions, the latest rate increases are likely to increase hidden profits for many companies that claim losses.

Most Florida-based insurance companies are now set up to pay sister companies for management services, claims adjusting or other tasks. These companies often have the same owners as the insurer and operate with no employees of their own.

The practice has resulted in overhead charges to Florida consumers that are nearly twice the national average. The Herald-Tribune documented $1.9 billion in such payments in 2008 alone.

The current round of hikes will fatten those already inflated payments, warned Butler, the state's acting consumer advocate.

Because payments to affiliates are set as a percentage of premium, any rate increase to homeowners is also an increase in what the affiliates get paid.

Butler made the point this month before state regulators, noting First Home's pending request for a 39 percent rate hike also means a 39 percent pay raise to its management firm, controlled by the same man. The hike would raise the bill First Home customers must pay for salaries and office expenses from an average of $528 per policy to $681. The national average is $277.

"They can't argue their expenses are more," Butler said.