--Assurant agrees to lower cost of home insurance
--Company doesn't admit or deny wrongdoing
--State: J.P. Morgan Chase profited from insurance deals with
Assurant
(Updates with information on profit-margin targets, comment from
J.P. Morgan.)
By Leslie Scism and Erik Holm
Assurant Inc. (AIZ), the largest seller of "force-placed" home
insurance in the U.S., agreed to pay a $14 million penalty and
provide restitution to some New York homeowners under an agreement
with state regulators to settle allegations of overpriced insurance
and excessive profits.
Gov. Andrew Cuomo on Thursday said the pact addresses an
"intricate web of relationships between insurers and banks that
pushed distressed families over the foreclosure cliff."
The policies are "forced" on borrowers who drop their required,
standard homeowners coverage, which protects banks' collateral.
Struggling borrowers may seek to save money by canceling their
original policies that are required when they take out a mortgage,
unaware they will be hit by much-costlier forced coverage if they
fail to restore coverage on their own.
The settlement follows hearings by the New York Department of
Financial Services last year that grilled Assurant, other insurers
and their banking partners about their relationships. The state
maintained those relationships have been highly profitable for the
companies at the expense of consumers.
In one example cited by the state in its Thursday announcement,
Assurant allowed a bank-owned reinsurance company to reap profits
from the insurance transactions. The New York regulators said J.P.
Morgan Chase & Co. (JPM) "has made approximately $600 million
since 2006" through such transactions with Assurant.
A J.P. Morgan spokeswoman described the bank's arrangement as a
"risk-sharing relationship," meaning it profited by taking on some
underwriting risk. She said J.P. Morgan received "no commissions"
from Assurant.
Under the terms of Thursday's agreement, Assurant agreed to
lower the cost of many of the home-insurance policies it sells in
the state and to eliminate "improper and unfair practices" that the
state said helped Assurant inflate premiums. These include paying
commissions to banks or mortgage servicers on the policies they
provide and using reinsurance companies affiliated with the
mortgage companies.
Assurant agreed to provide restitution to some homeowners who
were harmed by its practices, including homeowners who were
foreclosed on because of the cost of the coverage, the state
said.
In a news release, Assurant noted it neither admitted nor denied
any wrongdoing in the settlement, and said it was modifying
"certain lender-placed business practices consistent with new
regulations expected to be issued by the NYDFS that will apply to
all New York-licensed lender-placed insurers of properties in the
state."
The state launched its investigation into the force-placed
insurance industry in the fall of 2011. The investigation revealed
that the premiums charged to homeowners for the coverage can be two
to 10 times higher than premiums for voluntary insurance, "despite
the fact that force-placed insurance provides far less protection
for homeowners than voluntary insurance," state officials said in a
news release Thursday.
"Insurers and banks built a network of troubling relationships
and payoffs that helped drive premiums sky high," said Benjamin
Lawsky, superintendent of the state's Department of Financial
Services. "Those improper practices created significant conflicts
of interest and saddled homeowners, taxpayers, and investors with
millions of dollars in unfair and unnecessary costs."
The insurers and banks have argued the premiums are appropriate
given the costs and risk they incur. They maintain the prices
reflect that they often insure vacant properties and do so without
inspections.
Gene Mergelmeyer, president and chief executive officer of
Assurant's specialty-property business, said in the statement:
"With matters resolved with the New York Department of Financial
Services, we look forward to filing (for regulatory approval) our
next generation lender-placed product as we continue to meet the
needs of our clients and customers in New York with outstanding
service and support."
Under its agreement with the state, Assurant said it would
submit a price plan to regulators where the company expects to
spend about 62 cents on claims for every dollar it collects in
premiums. Last year, the specialty-property business spent 46 cents
on claims and 39 cents on other expenses, including commissions,
according to a regulatory filing.
Assurant shares were off 1.6% to $43.81 in recent trading. The
shares have jumped 26% so far this year as a federal regulator
rejected an attempt by mortgage-finance giant Fannie Mae to lower
costs for the insurance by injecting competition into the
market.
Assurant and Australia's QBE Insurance Group Ltd. (QBIEY,
QBE.AU) dominate the force-placed market in the U.S. Last year,
Fannie lined up a consortium of insurers led by Zurich Insurance
Group AG that would have offered lower-cost coverage. But the
Federal Housing Finance Agency rebuffed that effort last month.
In the state's announcement of the deal, Mr. Lawsky said he
expected other force-placed insurers to "step up to the plate now"
and put in place the changes agreed to by Assurant.
Write to Leslie Scism at leslie.scism@wsj.com and Erik Holm at
erik.holm@dowjones.com
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