With one hand, Florida regulators slapped the wrist of the state’s largest private insurer with a $1.3 million fine for rules violations this year. They also found Universal Property and Casualty Insurance Co. said it lost money but shifted tens of millions of dollars to affiliated companies by paying them above-average fees for services.
With the other hand, the state’s Office of Insurance Regulation waved through the company’s rate increase of 14.1 percent, or about $107 million — without a public hearing or any involvement by the state’s insurance consumer advocate, records reviewed by The Palm Beach Post show.
Universal asked for a 14.8 percent increase. It got 14.1 percent.
Universal’s treatment renews questions weeks after Florida Chief Financial Officer Jeff Atwater asked Insurance Commissioner Kevin McCarty why homeowners’ rates are not coming down. Atwater cited reports showing a key cost for insurers — reinsurance, or back-up coverage to pay claims if catastrophe hits — has fallen 15 percent to 20 percent.
As the heart of hurricane season arrives this month, the rate increase approved in February hits 522,000 Florida families to the tune of about $200 per policy per year. That includes more than 60,000 families in Universal’s biggest market, Palm Beach County.
The fine announced May 30 amounts to about $2.40 per policy, though it would have no direct effect on consumer premiums. The company has contested the findings.
“Esssentially the fine was 1 percent of their rate increase,” said Gavin Magor, senior insurance analyst for Weiss Ratings LLC of Jupiter. “It put them in a very profitable position.”
Records show the company is enjoying an earnings boom. Net income for the second quarter of 2013 jumped 119 percent to $17 million at Universal Insurance Holdings Inc., the Fort Lauderdale-based insurer’s parent firm. The company boasted its strongest quarterly net income and earnings per share since 2007. That came after net income rose 50 percent to $30 million for all of 2012.
That’s good news for Universal’s 41 shareholders of record, who include current or former company executives.
But continued rate increases aren’t helping the bottom line of half a million Florida homeowners.
“Floridians not only deserve an explanation for why they have not seen any savings to date, they also deserve to quickly begin seeing property insurance savings in their bills,” Atwater wrote to McCarty.
Gov. Scott’s response
When The Post asked Gov. Rick Scott if he agreed with Atwater, Scott referred to state-run insurer Citizens.
“Here’s my focus: we need to continue to work to downsize Citizens,” Scott said at an Associated Industries of Florida event in Palm Beach last month. “We need to continue to make sure Citizens doesn’t waste money. We need to keep the focus on their salaries, travel policies, all these things. We need to do everything we can to recruit more insurance companies to the state.”
Citizens CEO Barry Gilway makes $350,000 at the state’s insurer of last resort that serves 1.2 million customers. He got no raise from 2012 to 2013.
Universal Insurance Holdings CEO Sean Downes received about $6.7 million in total compensation last year, or about 19 times as much, at a company that serves less than half as many customers. In addition, outgoing CEO Bradley Meier took home about $5 million in 2012.
For his part, McCarty responded to Atwater that reinsurance is only one component of rates. In a complex regulatory process, he said, it can take time for changes to show up in consumer bills.
Still, the lower costs seem to be filtering down for some companies. McCarty’s letter noted one insurer reported a 19 percent drop in reinsurance rates and proposed an 8 percent decrease in homeowner rates. A spokeswoman later identified the insurer as ASI Corp.
“I agree that it is necessary to provide economic relief to Florida families and the office will remain vigilant in its review of rate filings in accordance with Florida law to ensure all possibilities for such relief are identified and passed along to consumers,” McCarty wrote.
A May 30 order signed by McCarty fined Universal $1.26 million for what officials said were hundreds of violations of state rules for denying claims and canceling policies. Post coverage spotlighted company practices that the state’s insurance consumer advocate, Robin Westcott, called “reprehensible.” From Delray Beach to Gainesville, retirees and others were left with canceled policies and no coverage for devastating fire or water damage after they paid premiums for years. They filed one claim and were dropped, based on what the company said they left out of an application.
The Office of Insurance Regulation ordered Universal to follow state laws — among them, checking applications within 90 days, not waiting until a claim is filed.
Regulators also found Universal reported losses while paying higher-than-usual fees to affiliated companies for services. One reinsurance contract, since discontinued, guaranteed a profit of 25.1 percent to an affiliated company, state officials said.
Universal disputed the state’s assertions and sought a hearing to contest the fine. No hearing date has been set.
A 2005 law says no hearings are required for rate increases up to 15 percent, though a spokeswoman said McCarty can still call one if he deems it necessary under state law.
Justifying rate hike
Reinsurance expenses have been dropping industrywide, by all accounts. A state law curbed sinkhole losses. No major storm has hit the state in eight years. So why was this rate hike needed?
State actuary Ken Ritzenthaler wrote a “transparency in rate regulation” memo that explains the increase not in complete sentences, but a series of phrases such as “annual loss trends revised” and “loss development factors revised.”
Universal’s spending on salary, commissions and administrative expenses ran 50 percent or more above industry averages for 2008 through 2012, according to data from Weiss Ratings LLC, SNL Financial and the National Association of Insurance Commissioners.
At the same time, Universal’s spending on claims was lower than average for the property and casualty industry nationally — less than 55 percent of net premiums earned, compared to 63 percent for the industry, the data shows.
“The data for the expenses is revealing,” Weiss analyst Magor said. To him, it suggests the company is an “outlier” with comparatively high spending on things like salary and commissions. One remedy might be better controls on costs, not simply more rate increases, he said.
Universal spokesman Travis Miller called the comparison “false and misleading.” Universal’s own analysis found its expenses were comparable or even slightly lower compared to its Florida-based home insurance peers.
Universal acknowledged in a response to The Post that its reinsurance costs are falling, but said its rate request was prepared in 2012 based on experience from previous years. The company’s 2013 rate filing will “take into account the reduced reinsurance costs,” he said.
In addition, Miller said McCarty’s letter to Atwater notes in some years insurers agree to rate increases below what they believe are justified in order to lessen the impact on consumers. Increases may be “deferred until the next filing,” Miller said, but the insurer’s rate need does not “go away.”
As for the proposed fine, it has “nothing to do” with the rate filing, Miller said.
At the time the rate increase was approved, the state insurance office was a year and 10 months into a market conduct examination of Universal, meaning an in-depth look regulators periodically take into an insurer’s practices and finances.
That examination found in 2009, for example, that the insurer reported a $3 million loss in a tax filing but affiliated companies were making plenty of money. The insurer paid $46 million for services to Universal Risk Adjustors, which cleared what amounted to $44 million in profit, the state report said.
In addition, the insurer reported it employed only 14 percent of total employees for all Universal companies but paid for 72 percent of the office rental costs, the state report said. Parent firm Universal Insurance Holdings, for example, paid nothing for rent.
The situation “raises concern as to the fairness and reasonableness of intercompany arrangements,” the report found. McCarty’s May 30 order tells the company to provide additional information on agreements with affiliates within 30 days, though since the order is contested it is not yet final.
Millions to affiliates
In 2010, the insurer paid its own affiliates $86 million for various services including underwriting and loss adjustment, by the state’s count.
“Analysis of contracts with affiliates indicates that fees paid by the company are higher than those charged by other competitors writing Florida homeowners insurance,” the report said.
Universal disputes those contentions. The company says more than 20 of the top 30 active writers of Florida homeowners insurance have similar structures and Universal’s payments to affiliates are among the lowest, making them “appropriate and highly competitive,” Miller said.
The state investigation also found questionable investment practices. Until recently, the company’s investment activity was handled by one man, former president and CEO Bradley Meier, the report said. He stepped down from those roles in February, though he remains an adviser and paid consultant.
Close to half of Universal’s stock trades were related to mining and precious metals during an 18-month period ending in 2011 that the state examined. The company failed to achieve investment-related growth in its surplus since 2009 even as premiums from customers continued to increase, and it reported unrealized losses in early 2011, state officials maintained.
Miller took isssue with several points and said a three-director committee oversaw investments even during Meier’s tenure. The former CEO has no involvement with ongoing operations now as the company works closely with Deutsche Bank, which manages its portfolio, he said.
Three months later, the proposed fine is still in doubt. For more than half a million Universal customers, the much bigger rate increase is a certainty.
By the numbers
$200 — How much more Universal Property and Casualty Insurance Co. customers are paying per policy in 2013 because of a 14.1 percent rate increase approved without a hearing
$2.40 — How much a proposed $1.26 million state fine against Universal amounts to per policy, though it would have no direct effect on consumer premiums
14.8 percent — Rate increase Universal asked for
14.1 percent — Rate increase it got
Florida’s Biggest Property Insurers
1. Citizens Property Insurance Corp. 1.2 million
2. Universal Property and Casualty Insurance Co. 522,236
3. State Farm Florida Insurance Co. 405,762
4. Security First Insurance Co. 178, 252
5. St. John’s Insurance Co. 173,134
Palm Beach County’s Top Insurers
1. Citizens 119,900
2. Universal 60,627
3. Florida Peninsula Insurance Co. 19,649
4. United Property and Casualty Insurance Co. 17,502
5. Homeowners Choice P&C Insurance Co. 17,128
Source: Florida Office of Insurance Regulation as of June 30, 2013
In depth online
Read the state’s memo explaining Universal’s rate increase as well as extended answers from the company. It’s available to digital Palm Beach Post subscribers – or pay 99 cents for a day pass — at mypalmbeachpost.com