California has imposed a higher-than-expected rate cut onAssurant's force-placed line of insurance business in the state,creating concern by an analyst that other states might follow suitand the profitability of the line nationwide may be substantiallyreduced.

In an announcement Monday, California Insurance CommissionerDave Jones announced that Assurant had agreed to a 30.5 percentrate reduction, for "lender-placed" or force-placedhomeowners-insurance coverage offered by American SecurityInsurance Company, an Assurant Inc.-owned company.

Jones estimates American Security's gross premiums from thisline business to be $140 million in California in 2012.

 The reduction will result in an estimated $42.7million savings to homeowners, with an average savings topolicyholders of $577 annually, Jones says.

The new rates will be implemented within 90 days, and will applyto policies issued or renewed by American Security. The reductionwill benefit approximately 74,000 American Security policyholders,Jones says.

Jones estimated that the average annual savings for eachAmerican Security customers will be $577. American Security is thefirst force-placed insurance underwriter to be hit with the ratecut. The department says it is investigating 10 insurers thatprovide the coverage in the state. 

John Nadel and Alex Levine of Sterne Agee and Leach, New York,say the 30.5 percent rate cut was "far more" than the 17 to 18percent rate cut proposal Assurant submitted, "and we believe worsethan most investors anticipated."

Nadel and Levine say that the bigger issue is whether this willfuel similar size actions in other key states.

Nadel and Levine are voicing concern that other states lookinginto the issue, such as Florida and New York, could follow suitwith California's actions, which could have a substantive impact onAssurant's earnings.

They also see California's actions as imposing greater politicalpressure on these key states to follow suit withgreater-than-expected rate cuts going forward.

Nadel and Levine indicate that the drop in income from theCalifornia cut will be 85 percent of the premium cut, and thatAssurant has little room to cut costs to offset the drop inpremiums.

They estimate that if Assurant suffers an across-the-board 30.5percent rate reduction in force-placed premiums, Assurant couldsuffer a 20-30 percent reduction in earnings-per-share in 2013.

The entire force-placed or lender-placed industry has been underintense pressure all year.

State regulators have held hearings in New York and Florida, andit was also discussed at a recent quarterly meeting of the NationalAssociation of Insurance Commissioners.

California Insurance Department staffers "carefully examined theinsurers' annual financial statement data" at his request, Jonessaid, and found many cases of low loss ratios.

"The low loss ratios (the percentage of every premium dollar aninsurer spends on actual claims) were a flag to CDI officials thatrates charged by insurers may be excessive," Jones says.