Anew wave of claims litigation caught Heritage Insurance Holdings Inc. off guard in the firstquarter, cutting into the Florida-based insurer's profits and forcing it totake a reserve charge.
Thecompany said May 5 that it added $6.2 million to reserves in the period, drivenlargely by a combination of claim settlements and the reopening of other claimsthat it previously resolved. The legal losses have come as more policyholderselect to hire attorneys to represent themselves against Florida propertyinsurers.
"TheNo. 1 thing that drove adverse development was litigated claims, plain andsimple," Chairman and CEO Bruce Lucas said on a conference call to discussearnings. "We had claims that settled, we paid the policyholder, it was aclosed claim, and then they come back three to six months later with anattorney, and they want more money."
Claimssettlements contributed 5.5 percentage points to Heritage's loss ratio in thefirst quarter, with its reserve charge adding 4.1 percentage points on top ofthat. The company reported a 44.1% loss ratio to gross premiums earned, a jumpfrom its 25.8% loss ratio in the prior-year period and well above its targetrange of 29% to 32%.
Theinsurer's loss ratio also included 6.7 percentage points connected to severeweather stemming mostly from what the company said were the worst tornadolosses in its history. Heritage is responding by raising its rates andtightening some of its terms and conditions, among other actions, Secretary,Treasurer and CFO Stephen Rohde said.
Thosechanges should start to benefit the company's bottom line in the fourthquarter, and Rohde predicted a more stable next few quarters. But Heritage isbracing for continued pressure on the claims side from attorneys who havebecome increasingly aggressive.
"Hopefully,using our reserve methodology, we're OK now," Lucas said. "It's nosurprise that you see attorney-[represented] claims settle higher, because theyget fees."
Heritagepays out about $18,000 on average claims where the policyholder had anattorney, Rohde said, and about $10,000 on average for claims without anattorney attached.
Theinsurer's first-quarter net income fell to $7.4 million, from $30.1 million inthe year-earlier period.