Florida insurers’ fees to affiliates questioned

Florida property insurers are pressing state legislators to allow them to raise rates without regulator approval, citing losses in recent years. But consumer advocates and regulators question the legitimacy of the losses after four hurricane-free years in Florida.

One key issue: fees paid by some insurance companies to affiliates – most with the same executives and shareholders. Critics say these payments may be inflated and instead could be used to bolster reserves.

A Sun Sentinel review of 26 Florida-based insurers found that the companies collectively reported a $87.8 million drop in claims-paying reserves last year and a $206.9 million underwriting loss, incurred when premiums don't offset expenses.

Yet, all but four paid a total of nearly $300 million last year to managing general agents, or MGAs, that were affiliates.

Some of the money covers legitimate costs, such as administering policies and negotiating contracts. But unlike the insurers, their MGAs aren't subject to regulatory restrictions on profit and dividends, and they aren't required to file audited financial statements. Critics are also concerned about payments for shared office space and employees.

The 26 insurers accounted for nearly a third of Florida's residential property insurance market last year and participated in state programs to bolster the private insurance market. Since 2006, they received more than $247 million in low-interest loans from the state and more than $52 million in bonuses for taking policies from state-backed Citizens Property Insurance Corp..

Florida Insurance Commissioner Kevin McCarty cracked down this month on two of the insurers' transactions with affiliates.

While MGAs have a legitimate role in the market, McCarty told the Florida Cabinet last week there can be abuse, especially when the MGA is an affiliate. With "some there's little shenanigans … shell games where they can move money out through their MGA and upstream that to their holding company." McCarty said lawmakers should pass legislation to make the industry's use of MGAs more transparent. "If we could at least get notification in advance" that would help, he said.

Insurance industry representatives defend the use of MGAs as needed incentives for investors in Florida insurance companies. Representatives of the Florida Property & Casualty Association – a group of Florida-based insurers, including most of the 26 participating in state programs – said the companies, with help from MGAs, fill the gap left by major national insurers that scaled back in the state.

"The severity and frequency of claims are going up, rates are not keeping up with the risk, the big guys don't want to be here, [a few] of the small guys went out of business. It's not because it's a great market and everyone is making a fortune," said former State Sen. Locke Burt, who is on the group's board.

Burt, president of Ormond Beach-based Security First Insurance Co., said companies use MGAs to take advantage of tax benefits, a state law that allows them to charge policyholders a fee of up to $25 per policy and in some cases, the ability to pay returns to shareholders not allowed by the insurers. "I have a hard time characterizing complying with state law as a loophole," he said.

Insurers say their finances are precarious because rates haven't increased enough to offset increases in claims costs, even without major storms. Rates have been offset by discounts for homes that are fortified against storms, or fraudulent discounts in cases where upgrades were not really done, they say.

Broad measures to tackle those concerns and allow rate hikes have been approved by insurance committees in both the state House and Senate.

But critics say MGAs allow insurers to hide profits, boosting the argument for rate hikes.

"Now we know how insurance companies with the highest rates in the country, expecting hurricanes, can [appear to] make no money even when hurricanes do not strike," said Chip Merlin, a Tampa attorney who represents policyholders and was on a state task force last year to examine how to shrink Citizens. "We would have been better off just keeping those policies in Citizens if this is how the private market operates."

State-appointed Insurance Consumer Advocate Sean Shaw plans to release a report on MGA fees. Part of his analysis found that Florida policyholders pay 50 percent more for overhead costs than the national average. They pay $434 per policy for operating expenses while the national average is $289. "Consumers don't know exactly what the benefits are of these MGA agreements and if it's true that these MGAs are a way for profits to be siphoned out," he said.

McCarty recently threatened to suspend Southern Oak Insurance Co. in Jacksonville for "excessive" MGA fees that generated a $35 profit for the affiliate while the insurer "consistently" reported losses.

His office and the company recently agreed to limit fees to 8 percent for former Citizens policies and 22 percent for others.

Southern Oak President Tony Loughman said the company's $12 million MGA fee last year was used to pay a variety of operational costs, including agent commissions, customer service and printing and mailing policies. Loughman added that the affiliate gave the insurer more than $5 million last year and it plans on being "a long-term player in the Florida insurance market."

Julie Patel can be reached at 954-356-4667 and jpatel@SunSentinel.com.

Managing general agent fees

Of 26 home insurers that participated in state programs in recent years to boost Florida's property insurance market, 18 reported premiums weren't enough to offset expenses. Of those, five paid managing general agents commissions that are higher than the 22 percent cap regulators recently required for Southern Oak Insurance Co., according to a review of financial statements filed to Office of Insurance Regulation and the National Association of Insurance Commissioners.


Capitol Preferred Insurance Co. in Tallahassee spent $10 million of the $44.2 million in premiums on MGA fees. Lisa Miller, a spokeswoman for the company, said about $1.7 million of the premiums that paid for the MGA fees came from outside of Florida. After paying for employees' salaries, agent commissions, policy producing costs and other expenses, Miller said the MGA was left with a $4.5 million loss for Capitol Preferred but a $5.8 million gain from managing policies for another Florida insurance affiliate, Southern Fidelity Insurance Co.

First Home Insurance Co. in Jacksonville paid its MGA $13.1 million, or 31 percent of $42.6 million in premiums.

Homeowners Choice Property and Casualty Insurance Co. in Clearwater paid $23.8 million, or 26 percent of $92.7 million in premiums it collected to its affiliate.

First Home and Homeowners Choice officials did not return calls or e-mails from the Sun Sentinel.

HomeWise Preferred Insurance Co. in Tampa paid $39.1 million, or 24 percent of $160.2 million in premiums. HomeWise President Dale Hammond said the MGA fee goes to pay to service the policy, including paying rent, marketing and other operating costs. "You have to do all those things and you budget for them" anyway, he said. "I've run large national companies and the Florida [companies' operating expenses] are not higher by any stretch."

United Property & Casualty Insurance Co. in St. Petersburg paid a $46.7 million fee, or 30 percent of the $156.8 million in premiums it collected. Joe Peiso, the company's chief financial officer, said unlike some insurers, United also pays the MGA to adjust claims, including hiring contractors when needed to assess damages for claims.