Citizens Property Insurance Corporation Board of Governors Meeting Report: December 15, 2010

 

Citizens Property Insurance Corporation’s (“Citizens”) Board of Governors (“Board”) met in Jacksonville yesterday, December 15, 2010, prior to which Board members met in their role as the Florida Market Assistance Plan (“FMAP”) Board. 

 

FMAP

The FMAP Board approved its 2009 Annual Report for submission to the Florida Office of Insurance Regulation.  It was noted that FMAP’s goal is to achieve greater agent and consumer participation.  FMAP is a resource for consumers to find private market property insurance in Florida.

 

Citizens

Financial Reports

In his report, Citizens Board Chairman Jim Malone briefly reviewed the Finance and Investment Committee Report, as well as Citizens’ 2011 proposed Budget (“Budget”).

Citizens President Scott Wallace reported that Citizens has approximately $3 billion in premiums.

By January 1, 2011, Citizens estimates an in force policy count of 1.45 million policies, equating to a 38 percent increase from 2009.

Mr. Wallace indicated that Citizens projects a net income of $640 million, assuming there are no catastrophic losses.

Administrative expenses are $139 million, which represents a 13 percent decrease from the budgeted amount.  He explained that two-thirds of all salaries are directly related to providing policies and services.  No merit-based salary increases were given for 2011 and 21 positions were eliminated.

The Board approved the proposed 2011 Budget.

Also approved was a change in Citizens’ investment policy to lower its percentage of government and agency paper investments from 50 percent to 40 percent.  Board members agreed to assume more investment risk in 2011 and bifurcate the portfolio so the term of certain investments was longer than others.

Citizens Chief Financial Officer Sharon Binnun reported that the consent agenda item for the purchase of reinsurance brokerage services was removed at the suggestion of the Finance and Investment Committee and will be reconsidered at a later date.  At the Committee’s December 14, 2010 meeting, it was explained that three vendors had submitted proposals for brokerage services for three years, and all were recommended for hire on a rotating basis.  However, one firm declined to serve with any others, causing Committee members to disagree on how the matter should be handled.  Thus a decision on the item was postponed.

Mr. Wallace continued his report with an overview of Citizens in the Florida property insurance market.   Currently, Citizens has approximately 1.27 million policies in force. That number is expected to increase in 2011.

In the personal lines market, Citizens has a 20 percent share.  It has a 60 percent share in the commercial lines market and writes 65 percent of Florida high-risk policies. Overall, Citizens’ greatest exposure is in southeast Florida. 

In her report, Ms. Binnun updated the Board on various other financial matters, including emergency assessments, enterprise risk management and the Finance and Investment Committee’s Charter.  

She noted that, with $750 million in investments maturing before 2011 begins, Citizens currently has adequate liquidity and she did not anticipate needing any additional liquidity for 2011 in any of Citizens’ accounts.

To manage its investment portfolio of approximately $11 billion in cash and other assets, Citizens has hired five money managers, bringing the total to 12.  

2011 marks the second year for Citizens to increase rates as provided by the glide-path legislation passed in 2009.  Ms. Binnun added that the market for risk transfer has softened in recent months.

During the CFO report, the Board approved reducing Citizens’ emergency assessments from 1.4 percent to 1 percent with limited discussion.  Board members said this reduction was “very good news for Floridians.”

The Board also approved formalizing an Enterprise Risk Management program, for which Citizens’ Audit Committee is in process of recruiting a new director of Enterprise Risk Management.

“Now that we have gotten through another hurricane season we are making sure that come next hurricane season, we are ready to respond to the population of our state and our policyholders to provide the absolute best world-class response,” a Committee member explained.

Additional financial data included the following statistics as of September 30, 2010:

• Citizens’ total assets increased $3.5 billion, or 40 percent. This relates primarily to the increase in cash and invested assets resulting from the $2.4 billion pre-event bond issuance, a considerable increase in premiums collected and a decrease in nonadmitted invested assets.
• Net income was $197.9 million–64 percent more than expected.
• Citizens’ invested assets (at amortized cost) totaled $11.1 billion.
• Cash and invested assets increased $3.1 billion or 38 percent, due to the $2.4 billion bond issuance, net cash flow from 2010 operations, the collection of emergency assessment funds, and Florida Hurricane Catastrophe Fund (“FHCF”) reimbursements received during 2010 offset by the $96.2 million of debt service payments made and the $625 million of debt maturity during the first half of 2010.
• Approximately $42.3 million of Citizens’ operating funds are invested in the Florida State Board of Administration’s Florida Prime (“SBA Florida Prime”), formerly known as the Florida State Board of Administration’s Local Governmental Investment Pool. As of September 30, 2010, the entire $42.3 million invested in the SBA Florida Prime is invested in Fund B, which has been frozen from investor withdrawals due to that portfolio’s investment in distressed illiquid assets. As principal and interest payments are received, Citizens’ allocable portion is eligible for withdrawal and such withdrawals have been consistently made. Full realization of the principal value of Pool B assets is not readily determinable.
• Premium receivables increased $49.6 million, or 41 percent.
• Premium due from takeout companies decreased $2.4 million, or 56 percent.  At assumption, Citizens cedes all unearned premium to the takeout company for the policies assumed, then services these policies until they expire. This service includes cancellations and endorsements that could result in policyholder refunds.  In addition, many of Citizens policyholders are opting out of assumptions well after the assumption date, which causes a significant increase in premiums due back to Citizens related to depopulation.  Due to these large opt out receivable amounts, a more frequent billing cycle for all assumptions has been implemented.  The amount reported is net of any ceded premium receivables over 90 days or ceded premium receivables related to insolvent companies, inasmuch as these receivables have been non-admitted.  Citizens collected $18.8 million from assumption companies for the first nine months of 2010, although depopulation activity decreased during that time.
• Reinsurance recoverables decreased $4.7 million, or 20 percent.
• Assessment receivables increased $300.7 million, or 71 percent.
• Total liabilities increased $2.8 billion, or 59 percent.
• Reinsurance premiums payable increased $197.8 million, or 564 percent.
• Assessment income was $43.4 million, or 100 percent greater than expected, due to the recognition of a portion of the unearned post-event financing costs related to the 2005 HRA emergency assessment that was not included in the 2010 budget.

 

Citizens’ Fraud Awarenews Campaign Launches in 2011

Mr. Wallace reported that Citizens is launching a fraud awareness campaign in 2011, which will include training, educational material, outreach programs and press releases.

“This will set the tone for Citizens intolerance to fraud,” Mr. Wallace said.

 

Appointed Actuary

The Board designated Brian Donovan as Citizens’ appointed actuary for 2010.  He will begin preparing an actuarial report as of December 31, 2010, together with a Statement of Actuarial Opinion.   Mr. Donovan has served as Citizens’ Director of Actuarial Services since 2007.

Earl Horton and Yong Gilroy provided the Chief Insurance Officer Report.  This included discussions on the Operations Update, Actuarial and Underwriting Committee Report and Claims Committee Report.  Mr. Gilroy noted that Citizens has experienced an 18.6 percent increase in new claims in 2010.

 

Mitigation Credit Inspection Program

Their report included information on the Citizens Mitigation Credit Inspection Program.  2010 proved to be a learning year in which 16 percent of the initial inspections were completed.  The inspections impacted policy premiums by an average increase of $559 on residential properties and $2,700 on commercial properties. 

Citizens has a two-year plan to complete 320,000 inspections.  Board member Carlos Lacasa expressed his strong desire to move the program along quickly.

Approximately 600,000 Citizens policies currently receive wind mitigation credits.  By the end of 2011, 94,000 of those are expected to be inspected and fully processed.

No plan is currently in place to recapture inaccurate premiums that have been in place longer than 90 days.  Instead, the premium will be adjusted upon renewal.  This raised much discussion, with some Board members requesting further review of the situation.

The Claims Committee report revealed that 2010 saw 47,000 new non-catastrophic claims, out of which there was a 102 percent increase in sinkhole claims and new litigation assignments rose by 68.7 percent.

 

Other Items Approved

The Board approved the following items in the Chief Insurance Officer’s Report:

Sprinkler credits and exclusions

After a review of other insurance carriers’ commercial residential rules, rates, and forms for fire protection sprinkler risks, Citizens proposed an underwriting rule that would allow alternative documentation to be submitted in order to avoid application of the sprinkler leakage exclusions. Specifically, Citizens would grant the sprinkler credit and not apply the Sprinkler Leakage Exclusion if an agent were to provide the following documentation:

• Assurance of maintenance (evidence of flushing and hydrostatic testing for both underground and overhead piping);
• Verification of an adequate water supply and that fire pump installations have have been tested in the last 48 months; and
• Proof that a fire protection sprinkler system has had a full flow main drain test in the last 48 months.  This documentation may be provided in the form of a sprinkler maintenance contract, an annual sprinkler inspection report or a statement prepared by the local Fire Marshall or by a Florida licensed Fire Protection System Contractor.

In its review of other carriers’ applicable policies, Citizens had determined that:

• Most carriers provide sprinkler credits to commercial residential structures on the basis of an inspection conducted by ISO in which they evaluate and grade the level of protection the sprinkler system for the property.
• When ISO is not able to fully evaluate and certify the building’s sprinkler system, in most cases, the reason is related to paperwork issues (inspector was not provided with a copy of the original building plans) versus the actual system is not in operation, requires service, or is not able to function as intended or designed in the event of a fire.
• In addition to an ISO inspection, most companies conduct their own loss control inspections on every building they insure. This inspection includes an onsite inspection of any sprinkler system found in the building and independent verification that the system has been maintained and is on working order.
• One carrier requires documentation (annual sprinkler maintenance report) for new business and each subsequent renewal.  This third-party report is completed on an annual basis as part of a maintenance contract to establish that the system is in working order.
• In addition to insurance company guidelines, it is standard practice that inhabited buildings with sprinkler systems are inspected annually by local Fire Inspectors and/or State Fire Marshall.

Agent Commission Schedule

• The Citizens Agent Commission Schedule approved on June 2, 2009 was updated to coincide with the impact of Citizens’ approved 2011 rates.  To view the schedule, click here.

Amendment of the Commercial Single Building Definition

• After a review of Citizens’ commercial single building definitions to ensure consistency between multi-peril and wind-only programs, it was recommended that, for the next filing for Commercial Residential Wind (“CR-W”) and Commercial Non-Residential Wind (“CNR-W”), to amend the single building CR-W and CNR-W definitions so that they are identical to the corresponding Commercial Residential and Commercial Non-Residential Multi-Peril single building definitions. To view the current definitions, click here.

Mr. Lacasa and Citizens’ Chief Administration Officer Suzanne Murphy provided the Chief Administration Officer’s Report. This prompted discussion on changes to Citizens’ Organizational Ethics Program and Purchasing Policy, such as the prohibition of receiving gifts from vendors and disclosing conflicts of interest.  The Board approved the amendments, a copy of which can be viewed by clicking here.

Of the 22 proposed vendor contracts on the Consent Agenda, the Board approved 17.  Among the items not immediately approved were contracts for Legal Services Claims, Reinsurance Advisory and Brokerage Services, Staff Augmentation and Office Space, and Disclosure Counsel. Later, the Legal Services and Staff Augmentation contracts were approved individually, but, as mentioned earlier, the contracts for Reinsurance Brokerage and Office Space were removed.

Mr. Lacasa expressed his desire to see Citizens’ Bond Counsel work through a service firm rotating process in order to afford several firms the opportunity to serve Citizens. Currently, there is a single firm handling the provision of bond services.

The Board also heard updates from the Chief Information Officer, Internal Auditor, Market Accountability Advisory Committee and General Counsel.

The Board approved the Audit Committee Budget.

Citizens General Counsel Dan Sumner introduced Brian Diffenbaugh as the newest member in the General Counsel’s division.  Mr. Diffenbaugh, the former Florida Senate Banking and Insurance Staff Director, will serve Citizens as the Director of Ethics.

There being no further matters before the Board, the meeting adjourned.

 

Should you have any questions or comments, please contact Colodny Fass.