How Florida’s Citizens’ Surplus Loans to Private Insurers Would Work

Florida’s state-backed property insurer is considering for the first time whether to invest in private insurers to the tune of $350 million, with the hopes these insurers would then take up to 300,000 policies. The move is an attempt by the insurer to reduce its hurricane exposure and the likelihood of policyholder assessments.

The Citizens Property and Casualty Insurance Corp. board of governors last week gave its staff the green light to begin seriously negotiating contacts with private insurers. The contracts would for the first time see the state’s market of last resort in effect go into business with those companies.

Citizens Depopulation Committee Chair Chris Gardner said the program could revitalize the insurer’s depopulation efforts that have languished to removing fewer than 100,000 policies annually in recent years.

“I believe the way this program is conceived it could lead to a renaissance of the Florida market,” said Gardner.

Among the insurers lining-up to participate in the program are the Tower Hill Insurance Group, United Insurance Holding Group, and American Integrity Insurance Group. Other insurers expressing interest in the program include Bankers Insurance Group and several new companies.

Tim Meenan, representing the Tower Hill Insurance Group and American Integrity Insurance Group, said the program could serve as a catalyst to revive what has been a weak depopulation trend in recent years.

“There is no one plan that would depopulate Citizens,” said Meenan. “But if Citizens could go from 1.4 million policies to 1.1 million by Christmas it would be the kind of meaningful long term depopulation we haven’t seen.”

The surplus note loan program is complex and is slated to cost just a bit more than the $5 billion in surplus Citizens currently has on hand.

Citizens is setting aside $300 million for inland policies in the personal lines account and $50 million for the coastal account. The surplus notes are for a term of 20 years and limited to $50 million per insurer. For the first three years, the insurer would only be required to pay the interest on the loan, which is set at the rates on 10-year U.S. Treasury bonds.

The policies must be retained for at least 10 years and for the first three years rate increases are capped at Citizens statutory rate cap of 10 percent. The minimum total insured value an insurer must take to qualify for the program is at least $5.5 billion.

The participating insurers must also meet a number of financial standards including that they have been actively writing property insurance for at least two years and have a risk based capital ratio of 300 percent and minimum surplus of $25 million. They must also have in Florida direct written premiums of at least $50 million and enough reinsurance to cover a one-in-100 year and two one-in-10 year probable maximum losses.

While the broad outlines of the plan have been agreed to, there remain differences of opinion among Citizens leadership on some issues.

Citizens President Barry Gilway and several board members differ over how many $50 million loans could be issued per a holding company with several subsidiaries.

Tower Hill Holdings has three insurers looking at removing policies under the program including Tower Hill Preferred Insurance Co., at 43,250 policies; Tower Hill Select Insurance Co., at 38,212 policies; and Tower Hill Signature Insurance Co., at 49,825 policies.

Under the current surplus note program only two of the holding company’s subsidiaries would be eligible for a surplus note loan, which would be capped at $25 million.

Board of Governor Chair Carlos Lacasa said that while in principle he is not averse to lending more surplus to holding companies, he preferred to start out at a holding the line at $50 million that could be divided between two subsidiaries at $25 million. He said limiting the amount to $50 million would be the equivalent of a pilot program to “make sure the deal works.”

Gilway disagreed. He said that if the holding company subsidiaries could meet the necessary financial qualifications then loaning to them would help ensure that the surplus note program would be large enough to have an impact on Citizens PML.

“This is an opportunity not just to get the risk off our books quickly,” said Gilway. “It gets Citizens policyholders in the hands of a fine company for a huge length of time.”

Florida Association of Insurance Agents President Jeff Grady said it remains to be seen just how many insurers would be willing to participate in the program. For example, when it comes to the Florida market, being saddled with a policy for at least 10 years is a major commitment. Then there is the fact that many of the participating companies are likely to target some of the same policies.

“There are some policies out there that are just not going anywhere,” said Grady. “But maybe at this first phase there could be a sizable number of policies removed.”

No matter what Citizens and/or the potential take-out companies agree on when it comes to removing policies from the state-back insurer, both groups face the prospect of a hard sell when it comes to convincing Citizens policyholders that it is in their best interest to switch to another insurer.

Many insureds still are wary on new companies especially after the failure of several large insurers including Poe Financial and its three main subsidiaries. As a result of that failure, 350,000 policies, many of which Poe had assumed just a few years earlier, were dumped back into Citizens.

Senator Mike Fasano, R-New Port Richey, played-off that fear as he protested against the proposed $350 million surplus plan, calling it a “biggest bailout to corporations in Florida’s history.”

Insurance Consumer Advocate Robin Westcott also acknowledged she has concerns over Citizens’ latest depopulation program, especially given the lack of a third-party to fully vet the program. She said there are more Citizens policies that appeal to private insurers now that their rates are closer to actuarial levels.

“We just had a law change on ceded commissions and there are 230,000 policies at rate adequacy,” said Westcott. “Perhaps we should be pursuing those first before going the way of a surplus note.”

In an effort to overcome those hurdles, Citizens officials are moving to gain the public’s trust by educating them on the options. But that could be difficult given the results of a recent survey of 500 Citizens and 500 non-Citizens policyholders views on assessments.

Seventy-nine percent of Citizens policyholders and 89 percent of non-Citizens policyholders said they were not aware that they could be charged an assessment if Citizens faces a financial shortfall. The majority of both policyholder groups acknowledged they did not know Citizens has the authority to assess other carriers it the insurer is unable to pay its claims. And in a clear case of self-interest, Citizens policyholders indicated they supported lower rates even if that could lead to assessments on other policyholders.

Board member John Rollins said that every state official starting with Gov. Rick Scott on down needs to know this information if there is every to be a lasting solution to depopulation.

“This is a big public policy problem in this state,” said Rollins. “People come into Citizens, stay in Citizens, complain about Citizens, and all with very little information.”

Other Depopulation Plans Move Forward

With the gears slowly turning over the plan to use Citizens surplus to incentivize large insurers to remove policies, some other insurers are already planning to remove policies under a different depopulation plan.

Florida Insurance Commission Kevin McCarty recently announced that four Florida domestic companies have stepped forward with plans to assume up to 150,000 policies.

Florida Peninsula Insurance Co. has received approval to remove 35,000 policies, Homeowners Choice P&C Insurance Co., 75,000 policies; Southern Fidelity P&C, Inc., 30,000 policies; and Southern Oak Insurance Co., 10,000.