Ever since Citizens began floating the idea of transferring millions of surplus dollars to private companies last year, critics have blasted the deals as “corporate welfare” and said they lack transparency. The Heritage proposal became public just this week, after state regulators approved it. The company could begin taking policies out of Citizens next month.
Citizens said the deals make good financial sense, and the Heritage proposal will help the state-run insurer reduce losses by $280 million in the event of a once-in-a-century hurricane.
The state-run insurer of 1.3 million policies can levy charges on consumers if a major storm wipes out its surplus, and the threat of “hurricane taxes” is driving the push to downsize.
According to Citizens, some private companies need special incentives before they will agree to take over policies, and the company’s record surplus allows it to provide a cash buffer to smaller private firms. Without the transfers, the newly formed companies likely would not have enough capital to acquire Citizens’ policies. With low reserves, they could go belly up after a major hurricane.
Paul G. Neilson, vice president of claims operations at Heritage, worked at Citizens right before joining the St. Petersburg startup last September.
Heritage has four lobbyists in Tallahassee, and spent between $60,000 and $110,000 lobbying Scott’s executive branch and the Legislature in recent months. A company spokesperson said top officials declined comment.
Heritage is not rated by A.M. Best, a highly regarded insurance rating firm that ranks firms for financial stability. It has an “A” rating from Demotech, another financial rating firm. Citizens is requiring Heritage, with more than $100 million in assets, to raise $10 million more in capital.
Under the special agreement, policyholders shifted from Citizens to Heritage will not see rates increase by more than 10 percent each year for at least three years. Coverage offerings will be similar to Citizens, which has slashed coverage in recent years.
Citizens already privatizes the vast majority of its insurance operations — transferring billions of dollars to the private sector in contracts. An audit report last year found that many of those contracts were overpriced and Citizens failed to negotiate with its contractors. The company has since agreed to tighten contracting standards.
This transfer of Citizens’ surplus to a startup firm under favorable terms is likely to raise more questions about the state-run insurer’s spending. The company came under fire last year for spending millions of dollars on luxury travel, gourmet meals, severance packages and salary raises for executives and employees.
Earlier this year, Scott called hefty raises of up to $31,000 for top executives “ridiculous” and ordered Citizens to return them.
Citizens has since embraced tougher new policies addressing the various spending issues, but has not followed Scott’s orders on the raises.
Toluse Olorunnipa can be reached at tolorunnipa@MiamiHerald.com or on Twitter at @ToluseO.