In a twist, lawmakers, insurers argue Citizens Property Insurance in good shape

The following article was published in the Sarasota Herald Tribune on February 11, 2012: 

In a twist, lawmakers, insurers argue Citizens is in good shape

By Zac Anderson

It’s almost heresy in the Capitol, but one conclusion leaps out in the debate surrounding Citizens Property Insurance Corp. in certain committee rooms this year: Florida’s much maligned state-run insurer is in solid financial shape.

The idea runs counter to everything lawmakers and insurance lobbyists have been saying in recent years as they seek to dismantle the government insurance giant. It is being repeated in subtle, sometimes grudging, but unmistakable ways as lawmakers consider ditching one of the assessments Citizens can levy on private insurance policies after a major hurricane.

Insurance companies badly want the assessment gone, so lobbyists who normally denounce Citizens as financially unsound are highlighting the company’s $6 billion reserve, sterling credit rating and enviable borrowing ability to argue that the post-disaster income stream is no longer needed.

Florida’s largest insurer — with 1.5 million policies — is so healthy, they note, it could easily pay the $7.3 billion in claims from a repeat of the record-setting 2004-05 hurricane seasons. Citizens could even survive another Hurricane Andrew — the monster storm that hit South Florida in 1992 and sent the state’s insurance market into a 20-year tailspin — with relative ease, according to fliers being passed out by one insurance company executive at committee hearings.

The optimistic reviews of Citizens’ finances by some lawmakers and insurance lobbyists contrasts sharply with dire warnings they and Gov. Rick Scott have repeatedly issued in recent months.

Indeed, the idea that Citizens is a grave financial risk is being used to justify controversial efforts to push policies out of the state-run company and into the private market. One of those measures is included in a bill that has already passed the House. It would dump thousands of Citizens policyholders into unregulated “surplus” insurance lines, with companies that can raise rates without state interference.

Scott has made reducing the number of policies held by Citizens a priority. Over the last few months, the insurer has eliminated coverage on structures such as screened porches, pool cages and carports. Company officials also have moved to cap coverage on expensive homes and condos near the coast.

Lawmakers have justified those moves by saying the company has too much liability and could levy assessments on every insurance policy in Florida to help cover claims if a major disaster strikes.

“The very real possibility that Citizens could face billions of dollars in losses and does not have the money to pay for its claims, in my opinion, is the greatest financial threat facing our state’s economy and already overburdened taxpayers,” Sen. J.D. Alexander, R-Lake Wales, wrote in a newspaper opinion column last year.

But the change in tone on the Citizens assessment bill is so pronounced that some longtime Citizens defenders point to it as proof that breathless warnings about the company’s finances have long been exaggerated.

“The bottom line is the scare tactics that some of my colleagues use, that the governor uses and his administration, their scare tactics are not needed,” said Sen. Mike Fasano, R-New Port Richey.

Private companies pushing

As with most property insurance legislation, private companies are behind the push to largely eliminate one of the assessments.

State law lays out a three-tier assessment process in the event of a major disaster, with the first chunk of money coming from a levy on Citizens’ own policyholders.

If that is not enough, private policies are taxed. A final levy is placed on both Citizens and private policies if more money is needed.

Legislation that passed its final House committee on Wednesday and that is quickly moving through the Senate would eliminate the second stage of assessments for most homeowners and businesses.

Private insurers do not like the so-called “regular” assessments because they must front the cash to Citizens in a lump sum within 90 days and recoup the money from policyholders over time.

Instead, insurance companies want all their assessment to be levied in the third, or “emergency” phase. The companies can then pay Citizens over time, and a greater share of the cost is borne by Citizens’ own policyholders.

Insurance industry lobbyists have repeatedly pointed to Citizens’ surplus in arguing that the company does not need to collect assessment dollars immediately. They say eliminating the regular assessment would cause fewer private companies to fail after a major disaster and encourage more insurers to move to Florida.

Locke Burt, president of Security First Insurance in Ormond Beach, noted that the “eight hurricanes in a row” from 2004 and 2005 would hardly strain Citizens’ finances.

“You’ve got $6 billion in cash in the till,” Burt said after supporting the bill last week in the House Economic Affairs Committee.

Bill sponsor Rep. Ben Albritton, R-Wauchula, also highlighted Citizens reserves while discussing the company’s increased dependence on emergency assessments under his legislation.

“Quite frankly, statistically the chances of this thing ever being really triggered considering the kind of cash that Citizens has today is slim to none,” he said after the committee hearing.

But in a nod to the tightrope that bill supporters are walking, Albritton quickly added that his bill is good policy regardless of Citizens’ surplus.

“I’ve never framed this argument that way,” he said. “This has nothing to do with how well they’re capitalized or how well they’re not capitalized. That’s a discussion for another day.”

Sterling credit rating

Citizens also has a good credit rating, a large backstop of cash from the Florida Hurricane Catastrophe Fund and authority to issue bonds to borrow money to help cover claims costs.

Some lawmakers have questioned whether Citizens’ credit rating and borrowing ability would be hurt by losing a revenue stream like the regular assessment.

Company spokeswoman Christine Ashburn said Citizens’ financial experts are comfortable with how the assessment process would work under Albritton’s legislation even if the company’s surplus were depleted and greater levels of borrowing were needed.

“Any potential negative impacts relating to cost of additional financing and those types of things are outweighed by the positives which relate to helping the barriers to entry” for new private insurers, Ashburn said.

Such assurances have helped get Citizens defenders like Fasano on board with the legislation.

But Fasano also was struck by the financial figures presented during a recent Senate hearing.

“Citizens got up there and made it clear, they have $6 billion in reserves, the ability to bond, they are financially sound,” he said.

Burt has distributed fliers at committee hearings that indicate Citizens has significant resources to pay claims without using assessments in all but the most cataclysmic event.

The company can handle another Hurricane Andrew — a disaster predicted to occur every 42 years, in which total Citizens claims would be $13.5 billion today — with just 13 percent of damages being paid by assessments on private policies.

By Burt’s calculation, Citizens would draw on $4.2 billion in surplus, $6.5 billion from the CAT Fund, $600 million in private reinsurance payments and $400 million in policyholder surcharges.

The total assessment on private policies in an Andrew-like event today would be $1.8 billion.

The worst assessments would kick in after an event like the great Miami hurricane of 1926 — a disaster predicted to occur every 118 years with a probability of less than 1 percent each year — when Citizens would need $10.6 billion in regular and emergency levies today to help pay claims of $24.8 billion, according to Burt’s calculation.

Confusing the public

Lawmakers and insurance lobbyists typically focus on this worst-case scenario in pushing to shrink Citizens.

But Don Brown, a former Republican lawmaker and insurance agent who now works for the conservative think tank Heartland Institute, emphasized Citizens’ solid financial footing under most scenarios during a recent Senate hearing.

“At the time the regular assessment was put into the law it was very important because Citizens did not have access to ready cash,” Brown said. “They did not have the $6 billion in surplus that they now have and they did not have the credit rating to be able to borrow money fast, so it was very important policy at the time that it was implemented. But it has been overcome by events; it has been overcome by progress and is no longer necessary.”

Citizens’ financial strength could continue to improve if Florida remains free of major storms, with the company’s surplus and CAT Fund reserves growing at a rapid clip and the company planning to purchase another $500 million in reinsurance next year.

“When you hear in committee one day that Citizens is at risk of having to put these huge assessments on homeowners and then the next day you hear Citizens is sound, it confuses the public,” Fasano said.

Rep. Frank Artiles, R-Miami, said lawmakers frequently oversimplify complex insurance issues.

“You hear the constant critics: ‘Citizens is not stable, Citizens is not stable,’” said Artiles, who works in the insurance industry and has fought efforts to push people out of Citizens. “Too often we’re just doing sound bites, not real solutions.”

Artiles has been particularly critical of the surplus lines Citizens bill that already passed the House.

Citizens finances have been cast as a ticking time bomb in that debate.

“We’ve created a monster in this state,” said Rep. Doug Broxson, R-Gulf Breeze, on the House floor.

The bill passed by a 66-48 vote.

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