California has imposed a higher-than-expected rate cut on Assurant's force-placed line of insurance business in the state, creating concern by an analyst that other states might follow suit and the profitability of the line nationwide may be substantially reduced.
In an announcement Monday, California Insurance Commissioner Dave Jones announced that Assurant had agreed to a 30.5 percent rate reduction, for “lender-placed” or force-placed homeowners-insurance coverage offered by American Security Insurance Company, an Assurant Inc.-owned company.
Jones estimates American Security's gross premiums from this line business to be $140 million in California in 2012.
The reduction will result in an estimated $42.7 million savings to homeowners, with an average savings to policyholders of $577 annually, Jones says.
The new rates will be implemented within 90 days, and will apply to policies issued or renewed by American Security. The reduction will benefit approximately 74,000 American Security policyholders, Jones says.
Jones estimated that the average annual savings for each American Security customers will be $577. American Security is the first force-placed insurance underwriter to be hit with the rate cut. The department says it is investigating 10 insurers that provide the coverage in the state.
John Nadel and Alex Levine of Sterne Agee and Leach, New York, say the 30.5 percent rate cut was “far more” than the 17 to 18 percent rate cut proposal Assurant submitted, “and we believe worse than most investors anticipated.”
Nadel and Levine say that the bigger issue is whether this will fuel similar size actions in other key states.
Nadel and Levine are voicing concern that other states looking into the issue, such as Florida and New York, could follow suit with California's actions, which could have a substantive impact on Assurant's earnings.
They also see California's actions as imposing greater political pressure on these key states to follow suit with greater-than-expected rate cuts going forward.
Nadel and Levine indicate that the drop in income from the California cut will be 85 percent of the premium cut, and that Assurant has little room to cut costs to offset the drop in premiums.
They estimate that if Assurant suffers an across-the-board 30.5 percent rate reduction in force-placed premiums, Assurant could suffer a 20-30 percent reduction in earnings-per-share in 2013.
The entire force-placed or lender-placed industry has been under intense pressure all year.
State regulators have held hearings in New York and Florida, and it was also discussed at a recent quarterly meeting of the National Association of Insurance Commissioners.
California Insurance Department staffers “carefully examined the insurers' annual financial statement data” at his request, Jones said, and found many cases of low loss ratios.
“The low loss ratios (the percentage of every premium dollar an insurer spends on actual claims) were a flag to CDI officials that rates charged by insurers may be excessive,” Jones says.
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