Paige St. John: State-run Citizens continues to make a profit

Recent financial statements show Citizens Property Insurance has accumulated a $5.1 billion surplus, more than double the money now set aside by all of the 57 companies that make up the bulk of Florida’s private market.

The growing surplus means Citizens, even carrying the increased risk of 1.3 million policyholders, is in a position to withstand a replay of the 2004 and 2005 storms without triggering the need for a bailout.

Yet lawmakers who want to dismantle the state-run insurer continue to call Citizens a financial time bomb, requiring huge rate increases and moves to force thousands of policyholders out of the company.

Citizens’ financial situation contradicts comments by many state lawmakers as they push legislation to dramatically change Florida’s insurance market by tilting the playing field toward higher profits for private carriers.

“We find ourselves today with a company that, if it were a private company, at the very least would have been shut down by the Office of Insurance Regulation and not allowed to do business in Florida,” said Sen. Alan Hays, R-Umatilla.

Hays is the Senate sponsor of an industry-written bill that would require Citizens to reduce its coverage, exclude high-value homes and raise rates as much as 25 percent a year. Two other bills offered by Hays would deregulate rates of private carriers.

The Lake County insurance agent’s inland constituents are among the safest in Florida from hurricanes. But the majority of Citizens’ policyholders live in high-risk coastal areas where private coverage often is unavailable. All but 71,000 of Citizens’ current 1.3 million policyholders reported to the government-run company they were unable to find alternative coverage at any price.

In a telephone press conference arranged this week by industry lobbyists, Hays said rate freezes have prevented Citizens from building up “respectful” reserves.

Year-end financial statements for 2010 show that 42 of the 57 private carriers doing the bulk of their business in Florida posted losses of $522 million.

Citizens, unburdened by taxes, offshore reinsurance bills and management payments to affiliates, reported an $813 million profit.

The state-run carrier added more than $1 billion to the surplus it holds for the protection of its policyholders.

By contrast, the surplus held by Florida-based private carriers shrank by $25.7 million.

Those carriers, which provide most of the private home insurance in Florida, now have only a combined $2.2 billion buffer against future storms, less than half the surplus accumulated by Citizens. Much of the money to pay claims in a major storm would have to come from reinsurance, which the private carriers buy largely from unregulated, offshore companies.

Hays’ Senate bill would make it easier for insurers to pass reinsurance expenses to homeowners, giving carriers less incentive to control those costs.

Improving the private carriers’ poor health is why Citizens needs to raise rates, making room for private insurers to do the same, said Jeff Grady, president of the Florida Association of Insurance Agents. His trade group is the primary author of the bill that Hays introduced to remove Citizens’ competitive pressure on private carriers.

Grady concedes part of Citizens’ attraction is the guarantee it can pay claims.

The financial footing of private carriers continues to slip, and regulators warn another three to five companies may collapse.

The biggest costs remain untackled. Though some insurers were ordered to reduce the money they divert to affiliates, Florida carriers continue to bill themselves well above the national average for overhead costs and to pay out large amounts for reinsurance.

According to Citizens’ actuaries, even with 1.3 million policyholders, the state-run insurer now has the ability to absorb the hit of hurricane so powerful it is likely to hit only once in 25 years.

What’s more, Citizens could pay losses for the eight smaller hurricanes of 2004 and 2005 without triggering a public bailout.

It is the potential bailout — an estimated $11 billion would be needed to cover a once-in-100 years hurricane — that lawmakers cite as the rationale for dismantling Citizens.

The company has the capacity to tack on charges to its current policyholders. If it still needs more money, it can bill home, auto and business insurers across the state. Those fees are then passed to policyholders.

Hays contends Florida cannot raise that much money.

“I’d rather explain rate hikes than make an excuse to them when there is no money to pay their claims,” he said.

Citizens’ increased surplus does not deter critics.

At a recent committee hearing, Sen. J.D. Alexander, R-Lakeland, implied that Citizens would fail to pass scrutiny of a private rating firm such as A.M. Best.

But Citizens lobbyist Christine Ashburn argued Citizens’ ability to raise money to pay claims makes it one of the soundest insurers in Florida.

Meanwhile, the list of private carriers on weak financial footing now includes State Farm Florida, which holds less than 50 cents for every $1 in risk it insures. For years State Farm argued the ideal is $1 in surplus for $1.