Two years ago, Florida's Office of Insurance Regulation gave a man with no insurance experience and a poor credit record a license to take more than 100,000 homeowners policies out of state-run Citizens Property Insurance Corp.
Last month, regulators ruled that his company, Magnolia Insurance of Coconut Grove, was insolvent, forcing thousands of customers to find new coverage before hurricane season begins on Tuesday.
They weren't alone.
Also forced into liquidation last month was Northern Capital Insurance and its affiliate Landmark One, both of which had built their business over the past two years by taking customers from Citizens.
And the policy-shedding isn't over. In response to pressure from more than a dozen insurers created over the past few years to depopulate Citizens, Insurance Commissioner Kevin McCarty has released them from a requirement that they retain take-out policies for three years. Agents say that's resulted in a flood of nonrenewal notices, especially for owners of older homes in coastal areas.
"I'd say somewhere in the neighborhood of 300,000 policies are in the mill at this point when you include policies being shed by State Farm and Nationwide," said Jeff Grady, president of the Florida Association of Insurance Agents. "And they're not dumping the good policies. So when it comes to finding a new insurer, Citizens is kind of it."
The insurer of last resort is feeling the pressure. Scott Wallace, Citizens' president, said Thursday that "market dislocation and disruption" meant calls to his underwriting department were up 30 percent in recent weeks.
Despite four hurricane-free years, Florida insurers who have collected millions of dollars in premiums say they are struggling financially. "Insurers are losing big time during years when they should be building surplus," Grady said.
The great drive to depopulate Citizens, which has about 1 million policyholders, has shifted into reverse and the lawmakers and entrepreneurs who promised private insurers could do it better have gone silent.
But some people are saying the state's top regulator, in a rush to approve new insurers, should have seriously reviewed, rather than rubber-stamped, their business plans. They say too many premium dollars were moving out insurers' back door to affiliated management companies, rather than being socked away for a rainy day. And homeowners who find themselves boomeranged from a take-out insurer back to Citizens on the brink of storm season are panicking.
"I didn't even know that it was possible for an insurer to be insolvent in less than 30 days," said Judy Luciani of Largo, who was shocked to get a letter at the end of April saying her policy with Northern Capital was expiring May 30. "It's frustrating, to say the least."
Luciani's independent agent, Gordon Chernecky, has the walls of his cramped Clearwater office plastered with white boards tracking customers who have received nonrenewals. After watching people bounced around by financially unstable take-out companies, he recommends they return to what used to be considered the least attractive alternative.
"I tell them to go with Citizens," Chernecky said. "It's the best deal for the consumer."
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Northern Capital and Landmark, whose chief operating officer had previously worked in the state Insurance Commissioner's Office, started removing policies from Citizens in 2008. Within a year the companies had merged, but that didn't help their financial status. By the end of 2009, regulators secretly deemed the company "impaired" because it had just $1.2 million in surplus, far below the $4 million required.
At the same time the state was investigating Northern Capital's numbers behind the scenes, the company was being lauded by Inc. magazine as "America's Fastest Growing Private Company" with a reported three-year growth rate of 19,812 percent.
Following company losses in January, the state ordered Northern Capital to stop writing new policies in mid February, but it was allowed to renew existing customers. Grady, head of the insurance agents' trade group, said that meant "poor saps renewing got stuck" and must now seek a refund through Florida Insurance Guaranty Association. Florida's top regulator said renewals were allowed because a potential buyer was scouting the company.
"Nonrenewals could cause uncontrolled deterioration of the book of business, rendering any sale of the company impractical," McCarty said in a letter to Alex Sink, Florida's chief financial officer, in late April. When the sale fell through, the state pulled the plug, setting about 62,000 policyholders on the hunt for new coverage.
Northern Capital executives did not return phone calls seeking comment on the company's collapse. But the former chief financial officer of Magnolia, the second insurer to go belly-up last month, was willing to discuss the reasons for its demise.
Gregg Patterson, who had previous insurance experience, joined Magnolia as it was getting off the ground in 2008. Founder and president Henry James Irl, who had been taken to court in Florida and New Jersey for failing to pay his personal bills, had a bold plan: Make money by taking sinkhole and high-risk South Florida homeowners' policies out of Citizens.
"We hoped with the higher premiums, it would help cover our reinsurance cost," Patterson said. "Obviously, that was an error."
Irl, who did not return a call seeking comment, got a $20 million loan from a subsidiary of the Swiss insurer, Allianz Risk, to launch Magnolia. Patterson said the loan had demanding repayment terms that strained the company's startup finances. Add to that higher losses and reinsurance costs and lower investment income than expected and it was a recipe for disaster, he said.
"We knew within about 18 months that it wasn't going to work," said Patterson, who said Magnolia stopped filing required financial reports with the state after mid 2009. "It was a fast ramp-up, but it was highly leveraged."
Patterson denies that management, which took 26 percent of premiums to cover overhead, was overpaid. "That went to pay agents, Allianz and our call center," he said. "Money wasn't being frivolously spent."
Magnolia was put under supervision by regulators in December. Irl was forced to resign and the company was ordered to stop writing both new policies and renewals.
With no buyers or new investors on the horizon, the state put Magnolia into receivership at the end of April, sending about 36,000 policyholders back to Citizens.
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Dale Hammond is president of one of the companies, Homewise Insurance of Tampa, that is in the process of shedding about 30,000 customers statewide. But he still believes his company, which will retain about 100,000 policies, can make money in Florida's market.
Though the public focuses on hurricane losses, Hammond said reinsurance covers those extraordinary costs for an insurer. In nonstorm years, it's other issues that drive losses: unwarranted wind-mitigation credits, sinkhole claims, inadequate rates.
Having just jettisoned many of Homewise's policies in sinkhole areas and been approved for a 28 percent rate increase, Hammond is optimistic private insurers like his can be profitable.
"It's more about managing the company right," he said. "It's not an inherent problem with the business."
Kris Hundley can be reached at email@example.com or (727) 892-2996.