‘Now we have nothing. We’re free,’ says Paradise homeowner
A credit-rating company downgraded all of the remaining insurance businesses owned by Meridian’s United Heritage Insurance after claims from California’s catastrophic Camp Fire forced one of its companies to fold.
A.M. Best Co. said United Heritage Life Insurance of Meridian and Sublimity Insurance Co. of Sublimity, Oregon, were no longer as financially strong as they were. Best cut their financial-strength ratings from A- to B++. Best cut its rating for United Heritage Property & Casualty, also of Meridian, even more, from A- to B+.
That may not affect Idahoans or others who hold policies from the companies, barring another catastrophic event. Best said all three companies still have strong balance sheets and the apparent ability to meet their financial obligations.
However, because of the failure of United Heritage’s fourth company, Merced Property and Casualty Co., which served a portion of California where the fire occurred, Best said it was concerned about the adequacy risk-management policies throughout the United Heritage Financial Group.
The Camp Fire, which started Nov. 8 and was contained Nov. 25, was the deadliest and most destructive fire in California history. It destroyed more than 13,000 homes, mostly in Paradise in northern California’s Butte County, and caused 88 deaths. It caused more damage than the next seven most-destructive fires in California combined.
The Merced failure “raised concerns at A.M. Best regarding the overall adequacy of the organization’s ERM framework,” Best said in a news release last week. ERM is short for enterprise risk management, a term for a business’ evaluation of the dangers it faces.
Best said Merced failed to estimate adequately its risk for an “extraordinary catastrophic event,” concentrated policies in a small geographic area, and lacked adequate reinsurance protection. Insurance companies buy reinsurance to hedge against major disasters.
Dennis Johnson, CEO of United Heritage Financial Group, told the Idaho Statesman that the destruction from the Camp Fire “way exceeded what had been modeled” for a major fire. He said the remaining companies are adequately covered.
“We believe the companies owned by United Heritage Financial Group have appropriately covered their risks, including with reinsurance and catastrophic reinsurance on top of that,” Johnson said.
Companies that sell reinsurance have models that guide them on how much an insurance company needs, Johnson said. The Camp Fire is causing reinsurance companies to “re-evaluate and address their models,” he said.
If insurers end up paying more for reinsurance, home insurance rates could rise, too.
Last week, a judge in California declared Merced insolvent and placed it into receivership, allowing California’s insurance commissioner to seize the company and liquidate its assets.
Merced said in a report to California regulators that it wrote policies valued at $141 million in the area affected by the Camp Fire. Merced expects claims from the fire to exceed $64 million. Its assets total $23 million. Property damage from the fire could exceed $7.5 billion, according to RMS, a risk consultant.
Best considers its new ratings good, not excellent as the prior ones were. A downgrade can lead to a loss of confidence in a company by consumers and investors.
Johnson told the Idaho Statesman that he would not comment on reports from rating services. However, he said the three remaining companies have not been affected by Merced’s failure.
“It’s business as usual for those companies, and their balance sheets remain strong,” said Johnson, who also serves as CEO of United Heritage Life Insurance Co.
Dean Cameron, director of the Idaho Department of Insurance, said the state has no concerns with United Heritage’s operations in Idaho but is monitoring Merced’s situation.
“No one anticipated a fire that would wipe out a whole community,” Cameron said. “If the company had bought twice as much reinsurance, it still would be grossly inadequate for the amount of losses that have taken place.”
Before the fire, Idaho regulators had begun a routine review of the company.
“We are evaluating their books and evaluating their processes and evaluating whether they have adequate reserves and whether they went through the appropriate process to determine what their reserves should be and whether the reinsurance they’re buying is adequate,” Cameron said. “We have a whole laundry list — pages and pages — of things we’re reviewing with them.”
He said AM Best’s new ratings would be considered.
“We want to make sure Idaho consumers are protected,” he said.
Last year, United Heritage ranked seventh among companies selling homeowners insurance in Idaho. The company wrote $14.5 million worth of policies and had 4.1 percent of the Idaho market, according to the Insurance Information Institute. It is organized as a mutual company, where policyholders are the owners and receive dividends.
Nancy Kincaid, a spokeswoman for the California Department of Insurance, told the Sacramento Bee that the parent company in Idaho isn’t on the hook for Merced’s claims. Federal courts have long held that a parent corporation is not liable for the acts of its subsidiaries
“The company in California is responsible for the losses,” she told the newspaper.
Merced Property and Casualty was founded in 1906 by a group of farmers who had trouble obtaining fire insurance in an era when the area lacked firefighting coverage, the Sacramento paper reported.
The company confined its business to Merced County, located in the San Joaquin Valley between Modesto and Fresno, until it became became a subsidiary of United Heritage in 2013. The company It expanded its coverage area north through Sacramento and up to Paradise, 200 miles north of Merced.
The devastation points to why some insurance companies won’t write homeowner policies in areas prone to wildfires or where there were previous fires, said Kenton Brine, president of the Northwest Insurance Council, based in Seattle.
The California Insurance Guarantee Association, funded by the insurance industry, will pay out claims on Merced policies, up to $500,000 each. Claims over that amount will get added to the liquidation.
Idaho has a similar program, administered through the Idaho Insurance Guaranty Association, but its limit is lower, $300,000. The Idaho Legislature determines the cap, Cameron said.
The final chapter on Merced’s financial status will not be known for some time, Johnson said. Several lawsuits filed against Pacific Gas & Electric claim the utility failed to fix issues at a transmission tower that malfunctioned in the area where the Camp Fire began.
“There appears there may be a significant claim (by Merced) against PG&E,” Johnson said. “That is going to have to play out before we know what it means to our specific investment in Merced.”