Citizens has $19.5 billion after six storm-free seasons

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Posted: 05/27/2012

By: Charles Elmore, Palm Beach Post

Supporters of uncapped rates for new Citizens insurance customers have complained about the "hyperventilating" media coverage the plan has received, but insist such moves are necessary to protect Floridians from something really bad - assessments.

It's a popular refrain. Potential post-storm charges for customers of Citizens and other insurance companies have been called everything from a "hurricane tax" to a "ticking time bomb." Gov. Rick Scott, business groups, for-profit insurers and their allies in the legislature have sounded repeated warnings. They cast Citizens, the state's insurer of last resort, as a dangerous and shaky risk to the whole state.

Yet if the hurricane season that starts Friday brings a nightmarish replay of 2004 - a relentless Florida battering from such hurricanes as Frances, Ivan and Jeanne - the assessments Citizens expects to charge might surprise some people.

Zero.

Reserves on hand of more than $5.6 billion exceed the projected maximum loss to the company of about $4.3 billion, according to company documents and interviews.

How about a rerun of the devastating winds of Wilma and the rest of the 2005 season?

Zero.

All right, but what about the worst storm to hit Florida in modern times, Hurricane Andrew in 1992? What if a once-in-50-years storm smashes into the state on the 20th anniversary of Andrew's strike?

An Andrew sequel would not be good, but Citizens expects no emergency assessments, said Chief Financial Officer Sharon Binnun, who grew up in Palm Beach County.

"The good news, if we have an Andrew, we do not think we have any emergency assessments or any post-event bonding needs," Binnun said. "That's the best we've been. We are in a better financial position due to six years of no storms."

Citizens might need so-called "regular" assessments after such a rare storm, she said. On a $2,000 homeowners policy, Citizens customers in coastal areas - generally east of Interstate 95 - would pay an assessment of $300.

As of July 1, the regular assessment for customers of other insurers with a $2,000 policy would be $40.

The expected maximum loss to Citizens for a storm as rare as Andrew was pegged at $14.65 billion last fall, records presented to a Florida Senate panel show. The company has about a 23.5 percent share of the state's policies that include wind coverage.

Binnun said formal projections for 2012 were still being prepared as this story went to press, but a storm taking Andrew's path this summer would generate probable maximum losses for Citizens of about $15.7 billion.

Reinsurance needed?

Citizens entered 2012 figuring it has $19.5 billion in total claims-paying resources including its own reserves and the Florida Hurricane Catastrophe Fund backing it up, Binnun said.

It's possible the assessment risk might even be slightly lower by August, the month when Andrew hit 20 years ago. The company's surplus is expected to grow to about $6 billion by the end of 2012.

Also, Citizens is cutting its risk this year with programs that exclude porches, decks and outbuildings and no longer cover homes valued at more than $1 million. The changes are not yet being figured into projections, Binnun said. But the modifications, phased in as policies renew this year, are eventually expected to trim $1 billion off the company's risk picture.

Assessment details for a once-in-100-years storm in 2012 were not available, Citizens officials said.

Citizens reserves might be even higher except that the company has spent approximately $280 million to buy $1.5 billion of private reinsurance in moves questioned by some company board members.

Private reinsurance is often more than twice as expensive as coverage provided by the state's Cat Fund. Goldman Sachs is the senior underwriter in bond deals where fees and costs run 19.1 percent, Citizens officials said.

What's the advantage? The "a-word" comes up again. On May 1, Citizens board Chairman Carlos Lacasa declared it "a historic day in the state of Florida in reducing the potential for assessments on all Florida policyholders after a catastrophic event."

Board member Tom Lynch of Delray Beach, who runs an insurance agency, voted against the reinsurance plan. He said he would rather put the money in reserves to pay claims than buy expensive reinsurance that would not kick in unless losses exceed $6.3 billion. If the reinsurance is not needed when the contract expires, the $280 million spent to buy it just stays in the pockets of private reinsurers. Reserves remain available year after year until needed.

"My theory is it just didn't make sense," Lynch said.

Forecasts have called for a slightly lower-than-usual overall risk of hurricanes this year, though of course no one can guarantee one or more significant storms won't hit Florida.

50% rate hike possible

Whatever the risk, the threat of assessments has remained a popular reason for a series

of moves to raise Citizens bills beyond the 10 percent annual cap approved by legislators. An ongoing reinspection campaign to review discounts for storm-resistant building features - and in most cases drop them - has raised bills for more than 100,000 Citizens customers by more than $108 million, or an average of 23 percent for those hit with higher annual charges.

If enacted, a proposal this spring to uncap rates for new Citizens customers potentially will raise premiums more than 50 percent in parts of Palm Beach County and more than 90 percent in other places.

Amid laments from various officials about "hyperventilating" media coverage, Citizens President Tom Grady said at a meeting this month that people need to be reminded assessments hit ordinary folks such as a family of four making $35,000 or $40,000 a year.

"They have assessment exposure," Grady said. "That's not well-understood. They have to write checks that come out of their pocket."

Private firms still wary

Some homeowners agree. David John Flynn of Jupiter, whose insurer is not Citizens, said he already pays surcharges on his bill that support Citizens and is not eager to pay more.

"Let Citizens' customers pay completely for their insurance so I do not have to," Flynn said.

But the slim chance new assessments would be needed - the 1 percent risk, say, that a once-a-century megastorm slams Florida with the most expensive hurricane in the state's modern history - must be weighed against the effects of widespread and massive Citizens rates increases, consumer advocates said. That includes the impact not only on individual consumers, but on the construction and real estate industries and the Florida economy in general.

Citizens is by far the state's leading property insurer, with 1.4 million customers, including 140,000 in Palm Beach County. Most did not wind up there by choice but were dropped by other carriers. And many have no choice now.

"The consumer keeps taking it on the chin, getting mitigation credits taken away, seeing rates go up," said Sean Shaw, the state's former insurance consumer advocate and founder of a policyholders advocacy group. "The justification is the threat of assessments. But it's not a justification at all if the numbers don't bear out the alleged threat."

Citizens is growing, but not because it is out recruiting customers. On the contrary, the state-run insurer has ramped up efforts to "depopulate" itself and return people to the private market.

But State Farm dropped nearly half its remaining 32,000 Palm Beach County customers in 2011, state records show. Its exposure in the market slid from $10.9 billion to $3.2 billion.

Citizens added more than 20,000 customers in the county during that span to swell its market-leading total to 139,681, with its exposure growing from $54 billion to $59 billion.

In theory, brand-name insurers might return if the market became attractive enough. But when? Representatives for State Farm, Allstate (Castle Key) and Nationwide said they were unable to put a number on how much rates would have to rise before they take on new business in South Florida.

Citizens bills are getting so high some customers are taking unusual steps, such as dropping insurance and risking their own financial security. That's usually an option only for those who have paid off mortgages because lenders typically require coverage .

Earl Jones of Ocean Ridge said in a letter to The Palm Beach Post's editor that he dropped wind coverage for this hurricane season after his Citizens bill increased 100 percent following a reinspection for storm-resistant credits.

He said he had a new metal roof and Miami-Dade County -approved shutters for his windows, but was told that he would not get certain credits. The reason: He did not have a photograph of the secondary roofing material - which is under the metal panels.

"I believe I'd rather play poker blindfolded against a professional poker player using marked cards than allow a Citizens-paid inspector in my home again," Jones said.