Insurance Article Miami Herald re Citizens Taking Over the Poe Insurance Policies 7/06/06

 

In May 2005, William F. Poe Sr. grinned proudly as the city of Tampa named a downtown plaza after him, honoring him for his business success and generosity to the city.

Now Tampa’s native son is watching state regulators dismantle his insurance companies, the Poe Financial Group, the biggest insurance failure Florida has faced.

Poe Financial’s three firms — Atlantic Preferred, Florida Preferred and Southern Family — grew rapidly to become South Florida’s second-largest insurer of homes, condos and apartment buildings.

Though eight hurricanes of the last two years sealed its fate, Poe Financial’s demise was set in motion well before the winds blew.

Its undoing: an aggressive growth strategy and risky business practices, according to agents, analysts and Poe’s financial statements.

The Poe companies kept rates low so they could better compete for business. They skimped on reinsurance, a form of insurers’ insurance that would have protected them from huge claims. Despite deteriorating finances after the 2004 storms, they continued to take on more policies.

And all the while they continued to send millions upstream to their parent firm — an estimated $316 million after expenses in the past five years.

”They just weren’t collecting enough premium to cover the losses they had,” says Bob Rollins, president of The Beacon Group, a Boca Raton insurance agency. Alarmed about Poe’s financial condition, Rollins stopped writing policies for Florida Preferred in April 2005.

The rise and fall of Poe Financial illustrates some of the mounting problems faced by Florida’s insurance industry. Its growth went unchecked for years. Regulators failed to react aggressively to stem the company’s financial deterioration after the 2004 storms, and in fact Poe’s three insurers still met state guidelines.

Already, the responsibility of bailing out Poe is falling on consumers. The Florida Insurance Guaranty Fund is assessing most policies 2 percent of their annual premiums to raise $250 million to help pay 19,400 still-unresolved Poe claims.

On Saturday, most of Poe’s 320,000 policies in Florida will likely be transferred into the state-run Citizens Property Insurance. If Citizens runs out of money to pay future claims on these policies, homeowners across the state will have to make up the deficit.

SEIZING OPPORTUNITY

AS INSURERS FLED,

POE MOVED IN

When William Poe Sr. founded Poe Financial in 1996, he was hardly a newcomer to the insurance business.

A former Tampa mayor, Poe opened his first agency — a one-man shop to sell insurance policies — 50 years ago. By the late 1980s, Poe & Associates was one of the country’s top 20 insurance brokers and a publicly traded company.

By the mid-1990s, after Hurricane Andrew wrecked South Miami-Dade, fewer private insurers wanted to write policies in storm-prone Florida. The state-run Joint Underwriting Association (Citizens’ predecessor) was ballooning. Desperate to reduce the number of policies on its books, the JUA began offering bonuses to companies that took policies off the state’s hands. There Poe saw opportunity.

Poe Financial’s first insurer, Southern Family, started as a so-called takeout company. Most recently headed by Poe’s son William Jr., Southern Family initially insured older, smaller inland condo buildings. But in recent years, the company shifted to covering luxury waterfront towers — bigger, more expensive and riskier properties.

Atlantic Preferred, bought by Poe Financial in 2001, became Poe’s main vehicle for taking policies out of Citizens. The company assumed 113,577 policies from Citizens between 2003 and 2005.

Agents who lost Citizens policies they had written to Poe say many of those policies were for homes built before 1992, a risky proposition because homes built before stricter building codes could suffer more extensive damage after a storm.

David Gough, Poe Financial’s senior vice president, in an e-mail to The Miami Herald, said the company preferred to take out ”newer homes with concrete structures.” He says losses from takeout policies were no greater than losses from ones written directly by the company.

The company declined to make Poe Sr. available for an interview.

Poe formed the third company, Florida Preferred, in 2003. Agents say this company wrote policies for mostly newer homes.

A RISKY GAMBLE

BOOSTING PROFITS

CARRIES A PRICE

For several years, the companies grew fast. Agents say that’s for one simple reason: Their rates were as much as 50 percent lower than those of their rivals.

They were one of the few insurers willing to write a significant number of new policies for many years, says Fred Behnke, president of Behnke & Associates, a Hollywood insurance agency.

The companies also began to buy less reinsurance, the insurance insurers buy to reduce the losses they have to pay after a big catastrophe, financial records show.

Spending less on reinsurance boosted profits, but also risk. Case in point: Southern Family.

Southern Family was buying reinsurance to cover 50 percent of every $1 million in losses it faced in 2003.

The following year, the company cut back, taking on 65 percent of every $1 million itself. For example, on a $5 million claim on waterfront luxury high-rise, Southern Family would be on the hook for $3.25 million, instead of $2.5 million.

That meant it would have taken only six large condo claims in 2004 to wipe out all the money Southern Family had set aside to pay future claims.

But even that wasn’t the worst of it, according to two accountants who reviewed Southern Family’s 2004 annual statement.

The company’s surplus included a federal tax credit of nearly $27 million, a legitimate asset for accounting purposes but not real cash in the bank. ”You can’t pay claims with it,” said Richard Attanasio, an A.M. Best analyst who followed the Poe companies until early 2005.

But for all three companies, the 2004 storms dug a hole into their cash reserves and set the companies on a riskier course, a review of the companies’ financial documents reveals. The three companies reported more than $123 million in losses and 42,000 claims. And the money on hand to pay claims dropped 43 percent to a combined $49.1 million after Charley, Frances, Ivan and Jeanne.

Those losses didn’t slow the companies’ aggressive growth.

Two of the three companies sold more policies in 2005 than in 2004. Atlantic Preferred, in fact, got approval from insurance regulators to take on 14,002 windstorm policies — the riskiest kind because they cover homes and condos in coastal areas.

And both Southern Family and Atlantic Preferred sold off nearly all their investments last year to raise cash to pay claims, according to financial documents and the company.

In August, Poe began an intensive search for additional capital, talking to more than 50 investors in and outside of Florida, Gough says in his e-mail.

”Things became complicated when Wilma hit because the storm hit our bread basket and created over 80,000 claims,” he adds.

All four of last year’s storms swamped the Poe companies again: More than $82.3 million in losses.

Even as their surplus dwindled, the companies continued to funnel money to management companies and, ultimately, their parent firm — $260.2 million in the last two years and a total of $396.8 million in the past five years before any expenses.

The transfers occurred under a corporate structure approved by state regulators and used by most Florida-based insurers. Under the umbrella of Poe Financial, a management agency called Poe Insurance Managers and Mariah Claims Services administered the policies and serviced the claims. The insurers themselves had no staff.

The insurers and the affiliated companies have the same officers and directors; the affiliates, unlike the insurers, aren’t regulated.

It’s a popular — and fairly lucrative — way to run an insurer because it allows owners and investors to draw money out of the insurer before commissions, claims and other expenses are paid.

”That’s where the money leaks out from these [insurance] companies,” says Jeff Grady, president of the Florida Association of Independent Insurance Agents.

THE WELL RUNS DRY

MONEY IS FUNNELED

IN WRONG DIRECTION

Poe Insurance Managers was paid a fee, 26.5 percent of gross premiums — what policyholders pay — for servicing policies and essentially running the insurers. Generally, managing agency fees range from 25 percent to 30 percent of gross premiums.

Poe Managers also got a flat $25 fee for every policy written annually by the three insurers. Over the past five years, those fees add up to another $26.6 million.

If the Poe Managers’ expense rate is about the same as the 27 percent industry average, which includes agents’ commissions, that means about $316.3 million eventually flowed to a holding company and Poe Financial, the parent company. The company isn’t required to disclose this information.

Industry analysts say more of that money should have been returned to the struggling insurers. Yet since 2003 Poe Financial added back only $85.5 million in capital to the insurance companies.

”More of that money should have remained with the insurers to pay claims,” said John Gwynn, an insurance industry analyst with Morgan Keegan.

THE STATE’S BLESSING

COMPANIES MANAGED

TO PASS MUSTER IN ’04

State insurance regulators took a hard look at the Poe insurers after the 2004 storms and decided the companies met state guidelines for capital and reinsurance.

OIR backed off because Poe Financial pumped in capital: $40.5 million in 2004 and another $30 million in 2005.

Kevin McCarty, Florida’s insurance commissioner, says Poe’s capital and reinsurance were in line with standards and guidelines set out by the National Association of Insurance Commissioners.

McCarty stresses the state is ”very diligent” in its review process “because of the risk of catastrophic loss in Florida.”

Financial documents for 2005 show the Poe companies did buy a bit more reinsurance last year.

The state’s Office of Insurance Regulation could have modified the managing agency agreement for various reasons, but didn’t because Poe’s was in line with the market.

”I don’t think the Poe companies anticipated this,” says Bill Newton, executive director of the Florida Consumer Action Network in Tampa. “I would have hoped that Poe was going beyond the state guidelines for capital and reinsurance. But regulators are under a lot of pressure to attract insurers to Florida.”

OIR started intensive conversations with the Poe companies after Hurricane Wilma. In January, it asked both Atlantic Preferred and Southern Family to stop writing new policies.

The Department of Financial Services, headed by Chief Financial Officer Tom Gallagher, also took notice of the Poe insurers after Wilma when the number of consumer complaints jumped dramatically. Starting in January, DFS had weekly conference calls with Poe officials to gauge how claims and the complaints — now totaling more than 4,820 — were being resolved.

DFS says it didn’t step in earlier because OIR didn’t ask it to.

Gough at Poe Financial sees the company’s demise in a different light: “Unlike Citizens, we couldn’t tap the Legislature — really the taxpayer’s wallet — for funding.

“After so many hurricanes, and more forecast for the next few years, investment firms at the end of the day weren’t receptive to capitalizing a Florida-only insurer.”