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Allstate unit soundness questioned

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By BAIRD HELGES0N

bhelgeson@tampatrib.com

Published: July 14, 2009

TAMPA - Allstate was Florida's second-largest private property insurer when four hurricanes walloped the state in 2004.

Since then, the "Good Hands" company has shed more than half its customers and earlier this month announced it would change its name, a move designed to further distance itself from the parent company.

Now, an insurance rating company has downgraded the financial strength of the company's Florida entity, concerned that it might not be able to pay claims after a major disaster.

A spokesman for Castle Key, formerly Allstate Floridian Insurance Group, said Monday the company remains committed to serving Florida customers. The name change is not foreshadowing any plan to pull out of the state.

"We are in a strong financial position to pay claims," Nick Halliwell said.

Castle Key now has about 225,000 homeowner policies in Florida, down from 565,882 at the end of 2004. It is the fifth-largest private property insurer in the state.

Halliwell pointed to a sign of the company's commitment to Florida - a pledge to add 50,000 homeowner insurance policies and 50,000 condo and rental policies by November 2011.

But A.M. Best, a rating company in Oldwick, N.J., downgraded the financial strength rating for Castle Key from good to fair. Best said that the outlook was negative.

The downgrade reflects Castle Key's exposure to hurricane risk because it only operates in Florida, Best said.

The rating company isn't as concerned about Castle Key paying claims in normal times. The company ended 2008 with a $162 million surplus and $233 million in cash and investments.

The problem could come after a disaster, like a major hurricane.

Castle Key is unique because it is among two Allstate companies not financially backed by the parent company. The other is the New Jersey affiliate.

All other Allstate companies buy reinsurance coverage through the parent company. If a storm exhausts reserves, the Northbrook, Ill., company must inject more money to pay claims.

That is not the case in Florida.

Castle Key buys reinsurance from the state-backed Florida Hurricane Catastrophe Fund and the private market, enough to cover losses from a major storm or disaster.

But if a storm hits and the money runs out, the company could close its doors and leave the state on the hook to pay the remaining claims.

Allstate can send money to prop up the company, as it did after the 2004 storms, but it is not obligated to do so.

Best's analysts said they expect Allstate would come to Castle Key's aid if future storms tap out its resources. If not, analysts would further lower Castle Key's financial strength rating.

The state allowed national insurers to create standalone companies in Florida after Hurricane Andrew caused $40 billion damage in South Florida in 1992. State leaders made the change to protect parent companies from catastrophic losses in hopes that property insurers would not pull out of the state.

Allstate has given its Florida company about $1 billion since it formed as a separate entity in 1996, Halliwell said. The parent company has taken $285 million in dividends since then, none after the storms of 2004.

Allstate officials said they changed the name to formally acknowledge that Castle Key is not funded by its parent. Florida motorists will still buy auto insurance from Allstate.

The renamed entity is actually two companies: Castle Key Insurance and Castle Key Indemnity.

"We anticipate a seamless transition for customers," said Mike Sheely, Allstate's field vice president for the Florida region. "We will continue to deliver a high level of customer service and timely claim resolution when our customers need us most."

Allstate's 1,100 agents in Florida will represent Castle Key customers.

These agents can also write policies for other private insurers and Citizens Property Insurance Corp., the state-created insurer for those who can't get coverage in the private market.

Allstate's decision to change the name probably had more to do with pleasing Wall Street than distancing itself from Florida's troubled insurance market, said Bill Newton, executive director of the Florida Consumer Action Network.

Unlike some other large property insurers, such as State Farm, Allstate is publicly traded.

Allstate investors get spooked when they see all the bad news about hurricanes and Florida's tumultuous insurance market, Newton said.

This way, the parent company separates its name from the perils in Florida while benefitting financially from the insurance policies it still writes in the state, he said.

In the past five years, Allstate's Florida company has shed many of its riskiest policies.

"It got down to a really solid little book of business," Newton said.

Reporter Baird Helgeson can be reached at (813) 259-7668.

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