The insurer of first resort

REVIEW SUMMARY

Agency. Citizens Property Insurance Corp.

Industry. Insurance

Key. Increased competition will push down rates.

A major hurricane hasn't hit Florida in five years, but the state's property insurer remains vulnerable to catastrophe.

Floridians face a stark choice when it comes to fixing Citizens Property Insurance Corp: Pay now or pay later.

“It will take political guts to deal with the economic reality of the incredible financial risk that the state is taking on with our current setup,” says James Malone, the chairman of Citizens and senior managing partner of Qorval, a Naples-based business advisory firm.

The insurance industry is banking on the new administration of Gov. Rick Scott and Republicans in the state legislature to fix a problem that has evaded lawmakers for nearly two decades since Hurricane Andrew hit Miami in 1992.

When it was created after Andrew, Citizens was supposed to be the insurer of last resort for Floridians who couldn't get insurance in the private market.

Today, the state-owned agency has become the largest residential-property insurer in Florida with 18% market share, in part because former Gov. Charlie Crist froze rates for two years and allowed Citizens to compete with private insurers. Unable to compete against the state's subsidized option, the decision chased many companies out of the state.

Citizens now has nearly 1.3 million policies with exposure to $457 billion of risk. Malone says Citizens is budgeting for 1.45 million policies this year. Now, if a major storm hits a densely populated area of the state, all Floridians will likely have to pay for the damage in the form of special assessments.

Fortunately, Crist's rate freeze was lifted in 2010 and Citizens was permitted to raise rates at a maximum of 10% a year until it becomes sound. However, this “glide path” of annual rate increases could take another five years without hurricanes and legislators are now contemplating steeper increases.

“The 10% glide path is not sufficient to get those rates to an actuarial sound level within a reasonable period of time,” says Sen. Garrett Richter of Naples.

Richter, who is chairman of the Florida Senate Banking and Insurance Committee, says he had proposed 20% annual increases in the past. “There's a good environment to have that discussion,” says Richter, acknowledging the pro-business climate under newly elected Gov. Scott.

While painful to business and homeowners initially, higher rates will attract insurance companies back to Florida. Over time, increased competition could ultimately lower rates and reduce the number of policies at Citizens. “Capital will go where it's wanted,” Richter says.

“Let's begin debating it,” says Robert Ritchie, president and CEO of American Integrity Insurance Company of Florida in Tampa, one of the Gulf Coast-based companies that have had to compete against the state. “We got ourselves into a jam and we can get out of it.”

Successful Citizen

When he became chairman of Citizens nearly three years ago, one of Malone's objectives was to make the state agency a model for efficient and responsive service. He chuckles that Citizens runs so smoothly today that few policyholders worry about its ability to service and pay claims in the event of a storm. “Now, people want to stay with Citizens,” he says.

To be sure, five years without hurricanes have helped improve Citizens' financial situation. “Citizens' balance sheet is in far better shape,” Malone says.

Currently, Citizens has $11.3 billion in cash and invested assets. But the problem is that this sum would be half of what would be needed in the case of a hundred-year storm, which could cost $22 billion. This kind of a thin cushion would be unacceptably risky for a private insurance company.

If Citizens suffers a deficit from a catastrophic storm, Citizens policyholders would be assessed up to 15% of their premiums. If that were not enough, all Florida property and casualty insurance customers except Citizens policy holders would be assessed up to 6% of their premiums. Finally, if that were still not enough, Citizens policyholders could be assessed another 10%.

Credit rating agencies such as Moody's Investor Service and Standard & Poor's cite Citizens' ability to assess Floridians and raise as much as $37 billion after a storm as a positive. The broad powers of assessments, which are not available to private insurers, give Citizens an institutional grade that gives bondholders reasonable comfort that their principal and interest are secure. The favorable ratings helped Citizens sell a $2.4 billion bond issue in April at rates that were 1.5 percentage points lower than in 2009.

One of the major risks, credit rating agencies say, is not a future storm. It's politics. “Legislative changes made in recent years — which both helped and hurt Citizens — highlight the uncertainty of Citizens' operating environment, including the potential for future legislative actions,” says Moody's most recent credit research on the insurer.

Back to the future

Industry executives say the damage done by the Crist administration to freeze rates for three years and drive private insurers out of the state will take years to fix.

“The market's still very, very broken,” says Jeff Grady, president of the Florida Association of Insurance Agents.

Adding to the uncertainty now is a flood of sinkhole-related claims, especially in the Tampa Bay region. “It's shutting down the capacity of all the carriers,” Grady says. State Farm Florida, for example, says sinkhole claims are driving non-catastrophic losses per policy up 94%.

Furthermore, State Farm Florida, as part of an agreement with the state in 2009, dropped 125,000 policies in exchange for not pulling out of Florida entirely. While the company says it doesn't track where former customers found replacement coverage, Grady says most of them ended up with Citizens.

As of Sept. 30, State Farm was still the state's largest private residential insurer with 678,849 policies. It has filed for a 27.7% average rate increase on homeowners policies statewide.

To reduce the size of Citizens, most agree that rates need to be substantially higher to attract private companies. Malone says state legislators understand that better now than when he became chairman almost three years ago.

“They have a keen appreciation of the enormity of the problem,” he says.

Richter agrees, saying conditions are “much better than they've been since I've been in this arena.”

“I would advocate we go back to the future,” Ritchie says. When Citizens was created after Hurricane Andrew in 1993, its rates were established by averaging those of the top 20 residential companies.

Still, Ritchie and others acknowledge that rates can't be jacked up all at once. “It's a multi-year solution,” Ritchie says. “It took us four or five years to get here.”

Increasing the size of the Florida Hurricane Catastrophe Fund, which provides reinsurance for Citizens and private insurance companies, will only maintain the potential burden on taxpayers, critics say. The fund also has the power to assess Floridians after a big storm.

And it's not clear that insurance companies would jump back into Florida, considering the lingering effects of Crist's anti-industry rhetoric. What's more, insurance companies have suffered in the financial crisis.

“There are many wounded animals,” Ritchie says. “The people who would even consider it are either gone or looking at other things.”

Just because Scott is the new governor doesn't mean insurance companies are eager to return to Florida. “Companies are not going to turn the aircraft carrier around on a new law or a new legislative body,” Grady says.