Florida’s Take-Out Plan: Citizens Loans to Willing Private Insurers

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

The board of governors of Citizens has given its staff the green light to begin negotiating contracts with private insurers.

Depopulation Committee Chair Chris Gardner said the program could revitalize the insurer’s depopulation efforts that have faltered 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 and American Integrity, 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.

Financial Standards

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 leaders on some issues.

Citizens President Barry Gilway and several board members differ over how many $50 million loans could be issued to 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.

Carlos Lacasa, Citizens chairman of the board, said that while in principle he is not averse to lending more surplus to holding companies, he preferred to start out at 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 program would be large enough to have an impact on Citizens’ potential losses.

“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.”

Questions and Critics

Florida Association of Insurance Agents President Jeff Grady questioned how many insurers would be willing to participate in the program. He said that being saddled with a policy for at least 10 years is a major commitment for an insurer. Also, 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.

Some insureds remember the failure of several 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 acknowledged she also has concerns over Citizens’ latest depopulation program, especially given the lack of a third-party to fully assess 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.”

Westcott and Fasano are not alone in their concerns. State Rep. Frank Artiles, R-Miami-Dade, has charged that the plan is being rushed without a full understanding of its implications.

In a letter to Insurance Commissioner Kevin McCarty, Artiles took Citizens to task for not releasing the full details of its surplus note program until just days before the board gave its seal of approval. He also questioned whether Citizens even has the statutory authority to implement the plan.

[See Insurance Journal’s Focus on Florida supplement, pages 8 and 10, for opinions on the depopulation plan.]

“The legislature never delegated an unfettered right to Citizens to use its surplus in any manner it chooses to adopt,” wrote Artiles.

Artiles wants to know the role Tower Hill Group and American Integrity Insurance Co. had in developing the plan. Between the two of them, American Integrity and Tower Hill Group could receive $200 million from the program, an amount that Artiles said “represents an alarming concentration of risk.”

Artiles is asking Citizens and state regulators to hand over all correspondence, financial reports, and other information involving Tower Hill and American Integrity.

“At a time when Citizens is raising rates, reducing coverage, and telling Florida residents to pay more for less, Citizens has selected to deliver a $350 million gift to a few insurance companies,” wrote Artiles.

Public Trust

Meanwhile, 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 others.

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

With the gears 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.

Commission 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.

Topics Florida Carriers Excess Surplus Property Casualty