vetting process, even though six of 18 companies approved for takeouts between
2007 and 2011 have failed. Seven non-takeout companies licensed by OIR also
failed during that hurricane-free period.
"Florida's insurers must meet rigorous evaluations by the OIR to maintain all appropriate solvency standards," McCarty wrote in a February opinion piece in the Sarasota Herald Tribune.
McCarty said that while the private insurers often have low reserves, most have purchased backup insurance, or "reinsurance," to cover a major storm like Hurricane Andrew. He acknowledged that some insolvencies are inevitable, given the difficulties of the Florida marketplace.
Sam Miller, executive vice president of the Florida Insurance Council, said insurers also benefit from the Florida Hurricane Catastrophe Fund, the state-run reinsurer that is well-capitalized this year.
"You always have some companies that a major event will take them under, but most companies are strong," he said.
With major insurers like State Farm reducing its rolls in recent years, Citizens has relied on smaller, Florida-based firms for its downsizing effort. Despite large financial bonuses to incentivize the private companies, results have been mixed.
Of the 761,000 policies that were transferred out of Citizens between 2007 and 2011, nearly 40 percent have returned, as insurers went under or turned off customers by hiking rates. Many of the companies that accepted, then returned, Citizens policies received more than $150 million in bonuses and loans from the state-run company or taxpayers.
In most cases, the bonuses were not returned.
Citizens, sitting on a massive $6.4 billion cash surplus, has since doubled-down on its practice of giving financial incentives to takeout companies.
The $52 million deal with Heritage, and a previous $63 million deal with Coral Gables-based Weston Insurance, helped Citizens shed tens of thousands of policies and billions of dollars in exposure.
Both Heritage and Weston have been operating for less than a year, with business plans that rely solely on siphoning policies from Citizens. Weston has a B-rating from A.M. Best, the leading insurance rating firm, while Heritage is unrated. Another rating company, Demotech, gave Heritage an A-rating.
In the past, firms with Demotech ratings and takeout-focused business plans have gone under.
Take Magnolia Insurance Company, which also was A-rated by Demotech, until it wasn't.
Despite having heavy debt and no physical office, the Miami-based firm received its property insurance license in 2008. It took over 116,000 Citizens policies that year, but was struggling so much by 2010 that it had be taken over by the state.
Taxpayers ultimately had to pay more than $20 million to cover Magnolia's insolvency, and many of the policyholders returned to Citizens.
The state is now suing global financial services company Allianz to recoup some of that money, saying it gutted Magnolia with "exorbitant" fees to a web of affiliates. Allianz has flatly denied the allegations.
Toluse Olorunnipa can be reached at tolorunnipa@MiamiHerald.com or on Twitter at @ToluseO.
(c)2013 The Miami Herald
Visit The Miami Herald at www.miamiherald.com
Distributed by MCT Information Services
Most Popular Stories
- Twitter Coming to Phones Without Internet
- Entravision Initiates Quarterly Cash Dividend
- Amanda Bynes Enrolls in California's FIDM
- Warner Bros. Unleashes 'Hobbit: Desolation of Smaug' Merchandise
- Shanghai Smog Forces Factory Shutdowns
- Obamacare Doing Just Fine, Ky. Governor Says
- How to Arm Yourself Against CryptoLocker Virus
- Eagle Deaths OK'd for Wind Power
- Consistent Hiring Points to Stronger Economy Ahead
- How Monthly Jobs Reports Move the Markets' Needle