Florida’s Citizens, Heritage Defend Controversial Takeout Deal

Florida’s state-backed property insurer found itself on the defensive in Tallahassee this week as state lawmakers inquired into a deal whereby a private insurer stands to receive millions in exchange for removing policies.

Officials from Citizens Property Insurance Corp. acknowledged that the multi-million deal with Heritage Property & Casualty Insurance Co. did not go through the insurer’s usual approval process.

The deal was unveiled to the public on May 22 when a short-handed Citizens board of governors approved the deal by a 3-2 vote’ Letters were sent out to prospective policyholders just two days later informing them of Heritage’s intent to assume their coverage on June 28.

Heritage to date is slated to receive $33 million in premiums dating back to January 1 to remove 40,000 policies. It also could to earn another $43.8 million in unearned premiums on those policies for a total of $76.9 million.

House and Senate lawmakers questioned the deal’s timing and whether Heritage was granted preferential treatment due to political contributions made to state officials including Gov. Rick Scott.

Speaking before the Senate Banking and Insurance Committee, Citizens President Barry Gilway and Heritage Chair and Chief Investment Officer Bruce Lucas both accepted blame over how the deal was rolled out to the public.

Gilway said the handling of the deal was dictated solely by timing since the deal had to be executed before Heritage had to declare its premium base and secure coverage from the Florida Hurricane Catastrophe Fund by June 30.

As a result, Gilway said, Citizens departed from its normal process of taking the deal through its depopulation committee before taking it to the board of governors.

That decision, he said, was based on the timing of the deal and recognition that it was similar to one made in January when Citizens entered into a similar agreement with Weston Insurance Co.

Gilway took responsibility for the lack of communication and how the deal was handled and assured lawmakers that in the future the insurer would follow its normal procedures.

“You have my commitment on that,” he said.

Lucas also took responsibility for the timing of the deal, saying it was not until the Weston deal and the fact that Heritage raised an additional $35 million in March that the deal became viable. Otherwise, he said, the takeout could have not occurred until after this year’s hurricane season.

“The delays were my fault,” said Lucas. “I don’t think Mr. Gilway deserves any criticism on that nor the Office of Insurance Regulation.”

For some lawmakers, however, those apologies and the structure of the deal still did not overcome concerns over the lack of public scrutiny and the deal’s timing.

“If we as a state decided who was going to build our roads by the same process that we have here several of us would be in jail,” said Senator Jeff Clemens (D-Lake Worth).

Apologies aside, Gilway sought to refute the notion in the media that the deal rested on Citizens providing Heritage with part of its $6.5 billion in surplus.

“One misconception of the transaction is that this payment of unearned premium had something to do with Citizens’ surplus,” said Gilway. “It had nothing to do with Citizens surplus.”

Fundamentally, said Gilway, the deal was designed to replicate the normal pattern of depopulation insurers assuming policies in November and December.

Insurers typically remove policies during that period since it gives them six to seven months to collect premiums in advance of hurricane season, which begins on June 1.

Since the deal called for Heritage to start removing policies in June, the insurer entered into a quota share agreement with Citizens whereby Heritage receive the premiums paid by policyholders it assumed dating back to January 1 along with any losses sustained by those policyholders during the same time period.

Heritage will then collect the unearned portion of those premiums from the date of the assumption until the policies’ renewal dates.

Gilway also sought to answer a charge that although Heritage is responsible for any claims on policies it removed retroactive to January 1, the insurer could “cherry pick” policies that had little or no loss history.

Gilway said that Heritage’s decision on choosing policies was in effect no different than other take-out companies when tagging policies for removal.

“Another word for ‘cherry picking’ is underwriting,” said Gilway. “It just makes sense for a CEO of a company of a takeout to have the ability to say, ‘ This my strategy, this is the way I want to approach the market.'”

Thus far, out of the 39,000 policies assumed by Heritage, the insurer said it has received 286 claims, representing $2.4 million in losses.

Under questioning by lawmakers, Lucas said it is too early to tell whether the deal will prove to be financially beneficial to Heritage.

“A baseball game has nine innings and I submit we are in the second inning,” said Lucas.

Although Heritage is a relatively new company, this is not the first takeout deal it has done with Citizens. In December 2012, the company assumed 37,000 policies and removed another 4,700 in January. Those deals, however, did not include any financial agreements between the two insurers.

Meanwhile, Gilway touted the latest round of Citizens policy takeouts.

Regulators recently approved plans by 10 private insurers to remove 392,000 policies in November. Also, Gilway said, plans are in the works for another seven or eight insurers to remove an additional 200,000 in December.

Gilway cautioned, however, that the actual number of policies removed from the insurer would be less given that many companies likely will choose the same policies. Also, typically about 30 percent of policyholders reject the takeout offers.

Even so, said Gilway, he believes the depopulation activity could reduce the insurer’s policyholder roll to around 955,000 policies, even after taking new business into account.

“That would be the first time since 2005 that we have dropped below a million policies,” said Gilway.

Gilway said he believes that a primary reason insurers are stepping to remove this many policies is the coming establishment of the so-called “clearinghouse,” which is slated to become operational January 1.

At that time, every new policy application and renewal policy must first be shopped to the private market before the policy is eligible for Citizens coverage. If a prospective or current Citizens policyholder receives an offer of coverage from a private insurer within 15 percent of Citizens rates, they will be barred from entering the state-backed insurer.

“I frankly believe that why we are seeing this level of depopulation is companies know the clearinghouse is coming,” said Gilway. “And companies know that over the next 12 to 24 months all the good policies that are competitively priced will be gone.”