Florida’s Citizens, Heritage Insurance Strike a Deal

Florida’s Citizens Property Insurance Corp. has narrowly approved a plan allowing a domestic insurer to remove 60,000 policies and receive as much as $52 million from Citizens in exchange.

A short-handed Citizens Property Insurance Corp. board of governors by a 3 to 2 vote signed off on the deal with the Heritage Property & Casualty Insurance Co. last week.

Under the deal, the Tampa-based Heritage has agreed to take up to 60,000 multiperil policies, 40 percent of which will come from the high-risk areas of Miami Dade, Broward and Palm Beach counties.

Citizens’ officials said the deal should optimally shave off $16 billion in exposure and $439 million from the insurer’s current one-in-100 year probable maximum loss. Officials also project it could allow the insurer to reduce its Florida Hurricane Catastrophe Fund premiums in the neighborhood of $10 million.

“This is a great opportunity to place another 60,000 policies into the hands of one of the most capitalized companies in the Florida marketplace,” said Citizens President Barry Gilway.

This deal would not be the first between Heritage and Citizens. Last December, the insurer removed some 35,000 policies from Citizens and assumed another 6,000 in January. Those deals, however, did not include an infusion of cash from Citizens to Heritage.

Heritage President Rich Widdicombe said there area a number of factors that made the current deal attractive to the insurer including the fact that Citizens has rolled-back its coverage in a number of areas.

However, Widdicombe said the main attraction for doing the deal comes from the ability of Heritage to create an affordable reinsurance structure, which includes a quote share agreement with Citizens and private reinsurance.

“I would say the stabilization of the reinsurance market has made it appealing to do something like this,” said Widdicombe.

The Citizens quota share agreement calls for Heritage to assume policies retroactively to January 1 and going forward to June 28. In exchange for assuming the policies and 100 percent of the risk, Heritage could receive as much as $52 million out of Citizens current $6.3 billion in surplus.

Widdicombe noted it is unlikely the insurer will receive that amount since under current law agents and policyholders still retain the ability to reject an offer of coverage from the insurer.

“The $52 million is not what we are going to get since it assumes that all 60,000 policyholders would agree to the deal, but historically 30 percent opt out,” said Widdicombe. “I would say the benchmark would be around $23 million to $32 million.”

Heritage has agreed to a number of policyholders incentives it hopes will encourage homeowners to agree with the insurer’s offer of coverage.

Among other things, for the next three years all policies assumed by Heritage will remain under the so-called glide path that restricts annual rate increases to 10 percent. Heritage also said it will retain all policies for at least three years and replace any policyholder who chooses to find coverage elsewhere with another Citizens policy.

Florida Association of Insurance Agents President Jeff Grady said regulators are to be commended for including those provisions because it brings with it a certainty that prior takeout plans have not had.

“In the past, agents had no idea whether an assumption was a good deal because on the policyholder’s renewal they could face significant rate increases or upon renewal find themselves canceled and end up back in Citizens,” said Grady.

The deal, however, is not without its critics, who have expressed concern about the deal’s details and the speed with which Citizens signed-off on the agreement.

Instead of going through Citizens Depopulation Committee and allowing more time for public comment, the deal went straight to Citizens board just days after being unveiled.

Citizens spokesperson Michael Peliter said that time constraints made the speed of the deal necessary, especially given the fact that regulators did not approve the deal until May 17 and that the beginning of hurricane season was just days away.

“Given the timeframe of hurricane season and the deal’s logistics we went straight to the board,” said Peliter.

Peliter also pointed out this is not the first deal of its kind that Citizens has approved. In January 2012, Citizens agreed to use up to $63 million surplus to help Weston Insurance Co. assume about 31,000 wind-only policies from Citizens’ coastal account.

“It is very similar to the Weston deal with pretty much the same structure and that added a level of comfort,” Peliter said of the board’s decision to approve the Heritage deal.

Still, some board members expressed concern that the Heritage deal could in fact prove be the end of Citizens’ more traditional takeout program that do not include any reinsurance arrangement.

Last year, Citizens shed 300,000 policies to private insurers in deals that did not include any incentives like reinsurance or other bonus plans.

“We need to ask, ‘Are we cannibalizing the traditional take out programs?'” said board member Don Glisson.

Some also question whether Citizens ought to be using its surplus to incentivize insurers to remove policies. When Citizens first put the concept forward last year, some state officials charged it was “corporate welfare.”

That charge was enhanced when campaign records showed Heritage donated thousands of dollars to Governor Rick Scott, the Republican Party and various lawmakers.

Widdicombe, however, said the donations did not influence regulators or Citizens to approve the take-out deal.

“We donated to both parties and some lawmakers, but we didn’t get a pass or special treatment,” said Widdicombe.

Peliter said the Heritage deal is probable the last of its kind before hurricane season starts on June 1. Any other take-outs this year will likely come in November and December, which is when insurers traditionally put forward their take out plans.

Topics Florida Carriers Reinsurance Hurricane