State Farm, Citizens, FHCF Testify Before House Insurance Committee on February 3

On Tuesday, February 3, 2009, the Florida House Insurance, Business and Financial Affairs Policy Committee (“Committee”) met in Tallahassee, Florida.  To view the meeting packet, click here.

As part of its agenda, the Committee heard testimony from State Farm Florida Insurance Company representatives regarding their company’s decision to withdraw from the State.  The Committee also heard testimony from Citizens Property Insurance Corporation (“Citizens”) and Florida Hurricane Catastrophe Fund (“FHCF”) representatives.  One insurance-related bill ultimately was passed by the Committee. 

The following is a brief summary of the activities and discussions that took place during the meeting:

 

State Farm Florida Testimony

After providing a history of State Farm in Florida, State Farm Florida officials discussed their company’s decision to discontinue writing Florida property insurance.  Deteriorating surplus in State Farm Florida was cited as the impetus driving the company’s decision to leave the State. 

Following Hurricane Andrew in 1992, the parent State Farm company recapitalized its Florida company, which led to the creation of State Farm Florida in 1998.  From 1998 to 2004, State Farm Florida operated adequately; however, the 2004 and 2005 storm seasons resulted in the accelerated dissipation of State Farm Florida’s assets.  To sustain the Florida company, the parent company infused it with capital through a $750 million loan.  To date, State Farm Florida has been unable to repay the loan.  As a result of the current market conditions, State Farm Florida must discontinue writing property insurance in the State. 

After providing this history to the Committee, State Farm officials stressed the company’s desire to continue underwriting automobile and financial services products in Florida.

Several Committee members questioned the State Farm officials relating to options that could keep State Farm in Florida and the impact of the current financial market.  Vice-Chairman Alan Hays (R- Umatilla) asked whether changes in wind mitigation credit laws or the move by the State towards a free insurance market could keep the company writing property insurance in Florida.  State Farm officials responded that potential changes in the law could allow them to continue writing in Florida.  However, they were unwilling to state on the record specific circumstances that would trigger the company’s willingness to stay in Florida.  Rather they stated that significant additional capital and surplus would be necessary.  Responding to additional questions, the State Farm officials noted that the company is not involved in risky financial investments.  They also noted that their projected surplus will be gone in 2011.  

Florida Office of Insurance Regulation (“OIR”) Deputy Commissioner Belinda Miller provided a brief response to State Farm’s testimony, saying that State Farm could do more to remain in Florida, such as perform an independent mitigation study.  She noted that an independent judge upheld the denial of State Farm’s requested rate increase.  She also stated that it is both viable and preferred by the OIR that private carriers write those policies to be dropped by State Farm Florida.

 

Citizens Property Insurance Corporation (“Citizens”)

Citizens’ Chief Operating Officer Sharon Binnun provided an overview of Citizens, which currently holds approximately 1.075 million policies, $400 billion in insured property value, and 27 percent of Florida’s residential premium. 

Ms. Binnun reported that Citizens has $7.76 billion in cash and invested assets, $3.3 billion in surplus, $33 billion in potential regular assessments and $37 billion in potential emergency assessments.  She also reviewed Citizen’s depopulation process, claims operations, and private reinsurance issues. 

While Citizens did not purchase private reinsurance in 2006 or 2007, it purchased, in 2008, private reinsurance in the amount of $466 million for losses in excess of $1.6 billion in the High-Risk Account.  In response to Committee member questions, Ms. Binnun noted that, although the process might be problematic, Citizens could absorb the State Farm Florida policies that are to be non-renewed. 

 

Florida Hurricane Catastrophe Fund (“FHCF”)

Senior FHCF Officer Jack Nicholson (Senior FHCF Officer) gave a presentation on the background and status of the FHCF.  He began by noting that there is approximately $2.25 trillion of insured residential exposure exists in Florida.  Losses from the 2005 storm season required the FHCF to finance $1.975 billion.  The FHCF had a potential capacity of $36.344 billion in 2008/2009.  However, issues in the financial markets substantially affected the FHCF’s bonding capacity.  For 2009/2010, the potential capacity is $37.39 billion and there is expected to be a significant capacity shortfall based on the continuing adverse impact related to the capital markets.  As a result, the FHCF is looking at all available financing options to fill the gap, such as a put option. 

FHCF Financial Advisor John Forney also provided a review of the financial markets. 

Representative Hays stated that he finds it very disturbing that companies are purchasing reinsurance from the FHCF, which could be unable to pay its obligations. 

 

Legislation

The Committee passed one insurance-related bill during the meeting.

• House Bill 27 by Representative Kevin Ambler (R- Tampa) relating to Residential Properties.  This bill revises the laws relating to homeowners’ associations.  An amendment added to the bill eliminated a provision that would have authorized three or more condominium associations to form a self-insurance fund to cover insurance deductibles.

 

Should you have any questions or require additional information regarding the above matters, please contact Colodny Fass.

 

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