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Capitol Preferred Insurance Co., one of the top writers of homeowners insurance in Florida, has received approval from the state’s insurance regulator to shed 23,800 policies just weeks before the start of hurricane season.

In a , the Florida Office of Insurance Regulation found that the early cancellation of the Capitol Preferred policies was necessary based on its magnitude of losses in 2017, 2018, and 2019, the increased cost of reinsurance and “to protect the best interests of the public and policyholders,” according to an OIR spokesperson.

The regulator noted the move is “an extraordinary statutory remedy reserved to address insurers which are or may be in hazardous financial condition without the cancellation of policies.”

OIR has ordered additional corrective measures for Capitol Preferred, which writes business in South Carolina and Louisiana in addition to Florida, and said it will be closely monitoring the financial condition of the company until further notice.

The Tallahassee-based insurer also owns Southern Fidelity Property & Casualty (SFPCI) and had a total of 117,266 policies in force as of Dec. 31, 2019, according to OIR data, making it one of the top 10 homeowners insurance companies in the state at the time. OIR reported its policy count was at 108,870 as of May 3. According to the OIR consent order, Capitol Preferred sought to cancel 27,500 policies with 45 days’ notice, as permitted by Florida law in cases for insurers that are in a hazardous financial condition.

The insurer provided financial projections in its request, “which demonstrated that absent such action, it may not be able to maintain surplus to policyholders sufficient to meet [Florida law],” the order says.

OIR stated the policies that Capitol Preferred requested to cancel consisted of a block of 23,800 homeowners policies it acquired from its affiliate SFPCI in February 2019, and based on the documentation and financial projections OIR reviewed, “the SFPCI block materially contributed to both company’s past and projected losses and to its projected reinsurance costs.”

After analyzing the request to cancel the requested 27,500 in-force policies, OIR determined that canceling 23,800 policies from the SFPCI block “produced similar financial results” for the company, and resulted in almost 4,000 fewer policyholder cancellations. The insurer is required to give policyholders 45 days’ notice of cancellation and refund any unearned premiums no later than June 15.

The company’s financial issues were made public late last year when it sought a 47% rate increase from regulators on one of its 14 books of business. It later amended the requested increase to 36.5%. The filing was subject to a public rate hearing in February of this year where CEO Jimmy Graganella told regulators that three factors had brought the company to the point of needing the substantial rate increase – reinsurance costs, AOB abuse and, more important, first party lawsuits.

According to Graganella, 36% of the company’s claims at that time were called in represented by an attorney, up from 4%. “That’s a massive number,” he said at the hearing.

In the May 12 consent order, OIR granted Capitol Preferred a statewide average rate increase of 33.5% but even with the substantial rate increase, the SFPCI block “will continue to generate unsustainable losses,” without cancellation, OIR said.

Required Company Measures for Continued Operations

OIR stated that Capitol Preferred reported net losses of $5.1 million, $17.8 million and $25.7 million in its filed financial statements for the years 2017, 2018, and 2019, respectively, and said continued losses of that magnitude were not sustainable.

As a result of those operational losses and the threat of continued unaddressed losses, OIR further ordered that the insurer must submit an updated business plan to the regulator by July 1 that demonstrates the company’s ability to “generate successful operating results by the implementation of underwriting changes, rate adjustments, operational savings, capital management, and other significant modifications to its current business model.”

The plan must run from July 1, 2020 through Dec. 31, 2023, and include all assumptions used in its analysis including pro forma projections, cash flow analysis and reinsurance necessary to provide coverage for at least a 130-year event.

Additionally, the plan must reflect a number of stipulations including: changes to be made in underwriting procedures that would limit capacity for new business and properly price and underwrite all business written or renewed; pending litigation naming Capitol Preferred as a party; capital funding and access to capital for the immediate 12 months, among others.

The insurer must also file a five-year strategic plan with OIR by Dec. 31, 2020 that includes any plans for new products, plans to raise capital, new affiliates or mergers & acquisition, etc.

OIR states that it reserves the right to “retain an individual entity at the expense of Capitol Preferred to review all of the company’s direct and indirect expenses of its affiliates to determine if those expenses are fair and reasonable.”

Capitol Preferred must limit its new and renewal business going forward, and any changes or increases to this business limitation must be filed and approved by the regulator.

Policyholder Impact

The policy cancellations, which come less than two months after the insurer had its ‘A’ rating affirmed by financial analysis firm Demotech, came as a surprise to Florida Insurance Consumer Advocate Tasha Carter, who said she was not made aware that nearly 24,000 policyholders would lose coverage so close to the start of hurricane season.

“Of course, my immediate concern was for those policyholders having to obtain new coverage. But more importantly than that, it was the timing of this particular action, because these consumers are not only going to have to search for new coverage, they’re going to have to search for new coverage when we are approximately two weeks away from the start of hurricane season,” Carter said in an interview with Ãå±±ÂÖ¼é. “That definitely puts them in a very precarious situation where they’re going to have to really act as expeditiously as possible to obtain new coverage so that they’re adequately protected.”

Carter noted the 45-day statutory notification allows policyholders to have adequate time to search and obtain new coverage, but in this case waiting 45 days brings policyholders into July and should a named storm occur, they will be unable to obtain coverage as insurers stop binding policies in those circumstances.

The Insurance Consumer Advocate’s office will work with policyholders that need help obtaining coverage and Carter urged insurance agents to proactively contact their policyholders right away to assist them with the process of finding a new carrier.

“They have to be able to get coverage very, very quickly. They don’t have the option to languish and take their time,” she said. “While I’m encouraging them to get coverage as soon as possible, they still need to make sure that they are conducting thorough research and making informed decisions as well.”

Carter added that OIR has determined the documentation it reviewed and steps it has taken to cancel these policies will help improve the financial stability of Capitol Preferred for the more than 84,000 policyholders still with the insurer. She noted she is “very much interested in continuing to work very closely with OIR in monitoring and tracking Capitol Preferred’s financial stability and their actions to ensure that if there are any other challenges that may arise, that we can quickly identify them so that they can be addressed.”

OIR said in a statement to Ãå±±ÂÖ¼é that several steps have been taken to notify policyholders and agents of the cancellation of policies, including letters and emails that are being sent out this week, so that new coverage can be obtained.

In addition, OIR has notified Citizens Property Insurance Corporation of the upcoming cancellation of these policies, and Citizens has verified that they have sufficient customer service and underwriting capacity to handle applications for policyholders who are unable to find coverage in the voluntary market.

“Citizens has committed to being flexible and modifying processes as necessary to provide affected policyholders with access to coverage. Applicants will participate in the Clearinghouse at Citizens to make certain there is no coverage in the voluntary market,” OIR said.

Update: OIR said in a statement its priority is to ensure consumers have access to coverage, and “will make every effort to help consumers find coverage.” Consumers who receive a cancellation notice are encouraged to contact their agent to obtain replacement coverage. Consumers who are unsure if they are impacted are also encouraged to contact their agent. Capitol Preferred has established a dedicated consumer line for policyholders affected by the cancellations at 1-833-319-0615.

Consumers can report any issues to the .

Topics Florida Carriers Agencies Hurricane Reinsurance