Over the past three years, the state has quietly reduced the number of homeowner policies in Citizens Property Insurance by almost 800,000, delivering many of them to startup insurers with poor financial ratings.
Efforts to decrease the number of policies in Citizens — the state-run property insurer — dramatically escalated this year, with almost a half-million homeowners moved to private insurers.
But the private firms are not the State Farms or Allstates of the insurance world. They are mostly small companies, created in the last three or four years, that upon state approval can take policies out of Citizens by notifying the homeowner with a letter.
Homeowners who do not "opt out" of the transfer are automatically moved to the private firm.
About 160,000 homeowner policies will leave Citizens in November and December. Many are in the Tampa Bay area.
Of the 14 companies that took policies out of Citizens this year, 10 were rated "D'' or "E'' by TheStreet.com, a financial media company that has provided independent ratings of businesses for consumers for 15 years.
"These companies simply don't have any experience," said Melissa Gannon, vice president of insurance and bank ratings for TheStreet.com's ratings division. "A major storm could wipe them out."
Brian Schneider, an insurance analyst at Fitch Ratings, said earlier this year that many Florida companies appear highly leveraged and thinly capitalized relative to the amount of insurance they're writing.
Concern about the collapse of the so-called takeout insurance companies isn't lost on state officials, who continue to grapple with $800,000 in losses from the fall of Poe Financial Group, which ran three insurance businesses that failed.
Poe filed for Chapter 11 bankruptcy reorganization in August 2006, after storms caused more damage than the insurer could cover. To clean up behind Poe's collapse, the state assessed everyone in Florida who buys homeowner or auto insurance.
The last assessment required homeowner and auto insurance policyholders to pay an extra $20 for every $1,000 in premium.
By moving hundreds of thousands of homeowners into small, poorly rated insurers, is the state risking that all Floridians will end up paying for more Poe-like collapses?
Chief Financial Officer Alex Sink, who heads the Department of Financial Services, did not comment directly about the takeout companies; her spokeswoman, Nina Bannister, issued this statement:
"The Office of Insurance Regulation (OIR), under Insurance Commissioner Kevin McCarty, is responsible for authorizing and regulating insurance companies.'' Sink "expects Commissioner McCarty to ensure authorized companies operate in a sound manner, to monitor and take quick action when problems are detected, and to apprise the commission of any emerging issues that demand broader attention."
The OIR said it had reviewed the financial records of these companies to ensure they are sound but acknowledged that a major storm could wipe them out, leaving all Floridians on the hook.
Said spokesman Tom Zutell: "It appears from the numbers that enough companies in the private sector have demonstrated to the office that they have the proper surplus and reserves to pay out in the event of a storm. Could there be another monster like Katrina or worse? God forbid if there were. All bets are off at that point."
Lisa Miller, a Tallahassee insurance company consultant who represents one of the takeout insurance companies, American Integrity Insurance Co. of Florida, said the state's tough regulations — many of which resulted from Poe's collapse — ensure that the companies are sound.
"We do have tough financial scrutiny," Miller said. "This is the most heavily regulated industry in the country."
TheStreet.com rated American Integrity a "D-'' and said after its Sept. 4 review: "The D- rating means that … this company currently demonstrates what we consider to be significant weaknesses which could negatively impact policyholders."
American Integrity was rejected in its bid to garner part of a $100-million incentive program in Louisiana because it did not meet requirements for the program's risk-to-capital ratio.
Miller said the Louisiana requirements were overly stringent. She said she did not know about TheStreet.com's rating but pointed to the "A'' American Integrity received from the rating firm Demotech Inc.
Unlike TheStreet.com, which is independent and generates revenue from its publishing arm and through advertising sales, insurers pay Demotech an average of $6,000 a year to be rated; two-thirds of them receive an A.
Demotech president Joe Petrelli said the A ratings are based on the insurers' having substantial capital and backup insurance to cover claims.
"These are small companies, but they have substantial capacity because of reinsurance," Petrelli said.
By law, the takeout companies must offer premiums equal to or lower than Citizens.
Consumers who switch to private companies gain another advantage, said Citizens spokesman John Kuczwanski: If the state-run insurer could not cover losses from a storm, Citizens' policyholders would be the first assessed to cover a shortfall. Policyholders under private companies would be second.
The takeouts help Citizens reduce its exposure, which stands at $437-billion for about 1.2-million policies, he said.
Zutell, of the Office of Insurance Regulation, noted a problem in this for Citizens: The takeouts are focusing on the housing stock's "creme de la creme," leaving most of the worst policies with Citizens.
"If you are a company taking out policies, you would think they are not going to be snatching up very high-risk policies along the coast," Zutell said. "They're not taking the old homes in Largo."
Ivan Penn can be reached at email@example.com or (727) 892-2332.