Tower Hill's rating slides; company says outlook fine

A ratings firm says the company is in "poor" shape to cover possible catastrophe claims, but Tower Hill officials dispute their vulnerability.


Published: Tuesday, September 1, 2009 at 6:01 a.m.
Last Modified: Monday, August 31, 2009 at 11:32 p.m.

Gainesville-based Tower Hill Insurance Group's companies do not have enough surplus capital and reinsurance to cover property claims from multiple storms, according to financial ratings firm A.M. Best Co.

Tower Hill said in a statement, however, that it has more than enough to cover claims from any likely scenario, including two storms larger than Hurricane Andrew, which devastated South Florida in 1992.

A.M. Best announced last week that it had downgraded Tower Hill's financial strength rating from fair to poor in the "vulnerable" range.

Analyst Jeff Mango said Monday that the rating was largely based on Tower Hill's larger reliance on catastrophic reinsurance that would cover the company for excessive hurricane claims, while eliminating reinsurance that would share the cost of lesser storms. That left the company vulnerable to Florida's potential for multiple severe or frequent storms.

As a result of the rating, the Florida Office of Insurance Regulation is in the process of reviewing Tower Hill's reinsurance agreements and will determine if the company needs to buy more, said Tom Zutell, deputy press secretary for the state insurance office.

The state's insurance policies are the reason for Tower Hill's problem, said Scott Johnson, executive vice president of the Florida Association of Insurance Agents.

Johnson called the Florida insurance system a Ponzi scheme. The association has long maintained that the state keeps insurance premiums artificially low by denying rate increases that are needed to cover a major catastrophe.

The state requires that property insurers buy reinsurance from the Florida Hurricane Catastrophe Fund, which offers lower rates than commercial reinsurance.

Insurance changes instituted in 2007 also offered a second level of voluntary reinsurance from the Cat Fund, requiring insurers to pass on the savings in premiums charged to customers whether they buy that level or buy commercial reinsurance.

But the Cat Fund has $15.8 billion to cover a potential of $27.5 billion in claims, so Tower Hill opted out of the voluntary reinsurance and bought commercial reinsurance that could cover claims.

"Tower Hill policyholders can be assured their hurricane claims will be paid in a timely manner and will not have to wait for a bailout, if any, from the federal government before their claim is paid," the company said in a news release.

Tower Hill President Don Matz said the commercial reinsurance costs five times what the unfunded Cat Fund reinsurance costs and rose 15 percent over last year.

By buying the more expensive reinsurance without being able to raise customer premiums, the company was not able to buy as much reinsurance, Johnson said.

Tower Hill has some of the lowest rates throughout the state, according to the state insurance office.

The combination of rising reinsurance costs and lower state-mandated premiums is the reason large national carriers are leaving Florida or reducing policies here, Matz said.

"Rates have come down, but now you're seeing some of the symptoms," he said.

Despite the lower financial ratings, Tower Hill said in a news release that it can cover a one-in-140-years storm and a second 60-year storm, adding that all of the hurricanes to make landfall since 1992, including Andrew, were less damaging than a 60-year storm.

A.M. Best said in a news release that Tower Hill's vulnerability is partially offset by better spreading its risk throughout the state, its historical financial support from the parent companies and management's long-standing presence in the Florida insurance market.

The Tower Hill Insurance Group includes the Tower Hill Preferred Insurance Co., Tower Hill Prime Insurance Co. and Omega Insurance Co. It insures 162,000 policies, including 114,000 homeowners policies.

Insurers volunteer to be rated by A.M. Best, so not all are rated. Other Florida insurers rated by A.M. Best, including American Strategic Insurance Group, Florida Family Insurance and PURE Insurance, are rated in the "secure" range, Mango said.

Tower Hill has asked to be delisted from Best's ratings. Matz said the rating will make it more difficult to sell policies in the short term. "Over time, as we get our story out to agents, it will be fine."

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