Following nearly two years of modeling, stress-testing andrefining its business model, Weston Insurance Co. is ready toembark on a “precedent-setting” move to assume about $30 billion inexposure from Florida's bloated last-resort insurer.

Weston has been approved to take out a total of 31,000 wind-onlypolicies from Florida's Citizens Property Insurance Corp.—about 15percent of Citizens' coastal-account exposure.

The plan includes the first-ever removal of commercial wind-onlypolicies from Citizens—something the over-exposed, state-runinsurer says no other company has expressed interest in doing.

To start, Weston will look to assume 17,705 personal propertywind-only policies and 5,921 commercial lines wind-onlypolicies—split between commercial residential andnonresidential.

After additional scheduled take-outs before the end of May,Weston could be the owner of 23,000 personal policies, 5,000commercial nonresidential policies and 3,000 commercial residentialpolicies.

By law, personal residential and commercial residentialpolicyholders have the option to remain with Citizens.

The domestic insurer, which received its certificate ofauthority two months ago, has successfully gone through the rigorsof proving it can support the policies, access enough reinsuranceand follow the same glide path for rate increases as Citizens isbound by law to follow.

Michael Lyons, president of Weston Insurance, says there was a“clear signal for the need for capacity,” especially for commercialwind-only business. After speaking with state regulators, hestarted Weston Insurance Holdings in March 2011 and began coming upwith a business plan.

“No matter how good the plan was, it wasn't going to work unlessagents and reinsurers bought into it,” Lyons tellsPC360.

Lyons says his company spoke to agents, who expressed a“desperate need for wind-only capacity on an admitted basis”because the non-admitted market, they said, was too difficult tomanage in terms of pricing and coverage.

Weston contacted some of Citizens' top agents, gathered ahypothetical book of business and began “extensively modeling atthe portfolio level,” so the insurer was able to approach thereinsurance market with modeled results of actual policies fromCitizens, says Lyons, a mathematician with executive-levelexperience in both the insurance and reinsurance sectors.

“We told them: 'This is what we can get [from Citizens]. Wouldyou be willing to support it?”

Austin Neal, attorney for Weston andf Florida counsel forLloyd's of London, says reinsurers have welcomed the proposal towrite wind-only coverage.

“In discussions, it was clear that [reinsurers] feelthey understand wind risk,” Neal says. “To them, withwind-only, they know what they're reinsuring.”

The reinsurance component was essential to Weston's long-termvitality and its promise to offer comparable coverage and maintainthe Citizens' mandated glide path—rate increases of no more than 10percent per year—for a minimum of three years on all assumedpolicies.

“In listening to our policyholders, we've learned that one oftheir main concerns in evaluating a takeout offer is the worry thattheir rates will increase dramatically or their policies will becancelled at renewal,” says Barry Gilway, CEO of Citizens, in astatement. The plan needs approval by the Citizens' Board ofGovernors.

These concerns typically lead policyholders to stay withCitizens, or return to the insurer—the exact opposite of what theinsurance industry and policymakers in the Sunshine State have beentrying to do; that is, shrink Citizens below its status as thelargest property insurer in the state to reduce the potential foremergency assessments on taxpayers should a large catastrophicevent occur.

The Florida Office of Insurance Regulation stress-testedWeston's finances for 18 months against “all sorts of catastrophicand economic scenarios,” Lyons says. In their assessment,regulators considered the private-reinsurance marketplace as wellas the Florida Hurricane Catastrophe Fund.

Lyons says Weston received a “great deal of support” from theOIR and Citizens, once the OIR had concluded its stress-testing andWeston was issued a Permit Consent Order early last year. Thecompany has $50 million in surplus—well above the statutoryrequirement—and it is seeking an A.M. Best Co. financial strengthrating, in addition to the “A” (Exceptional) rating it has alreadyreceived from Demotech, says Neal.

As part of the plan, Weston and Citizens are entering aquota-share reinsurance agreement in which Weston will pay allclaims for the wind-only policies it has earmarked for assumptionuntil May 31. Citizens is paying Weston a premium for thecoverage—just in time for hurricane season.