Citizens Property: A plow horse, as sick as ever

I should congratulate Paige St. John for winning a Pulitzer Prize for covering Florida’s property insurance market before pointing out that her article last week on the health of Florida’s state-run insurer, Citizens’ Property, indicates that her grasp on the insurance business remains tenuous.

So, congratulations. The Florida HO market is a mess, and solid reporting can help clean it up. And Ms. St. John has done some good work.

But the April 13 story, implying that Citizens’ Property is one of the state’s healthiest insurers, grossly oversimplifies the issues that confront the state. And it implies that the insurer is getting stronger when, by an important measure, it is more vulnerable than it was a year ago.

The story:

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.

The whole article seems to imply that Citizens is a sort of property insurance Secretariat, outracing all the inferior, private carriers.

I’ve covered this territory before, so I’ll summarize here: Florida’s HO rates are too low. I know that sounds preposterous to Floridians who have to pay over $10K for one year of coverage. But if rates were even close to adequate, the state’s largest insurer would be somebody like Allstate or State Farm or Nationwide, not the state-run insurer. The big guys don’t run away from profitable business.

Right now, two types of insurers dominate the state:

  • Small “take-out” companies that write a lot of risks but must protect themselves by buying reinsurance. These companies can’t charge the actuarially appropriate rate themselves – the state won’t let them – but must buy reinsurance at the actuarially appropriate rate. As a result, their profits get squeezed and their ability to grow a capital base is restricted.
  • Citizens, a company that doesn’t need as much reinsurance because the state guarantees it will dun policyholders statewide for any underwriting shortfalls. So if there are no catastrophes, Citizens’ capital base grows.

And that’s what has happened – no major cats since 2005. So Citizens has grown its surplus to about $4.5 billion.

If this were a horse race, the state’s pony – Citizens – would be riding light. It doesn’t have to carry the burden of a sound underwriting policy.

It seems disingenuous to praise the financial health of Citizens without recognizing the enormous state subsidy it receives. If Citizens had to play the game the way the take-out companies must, it would have a similarly dismal outlook.

And it is a gross oversimplification to maintain that it is a healthy insurer just because it can withstand a moderately bad hurricane:

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.

True enough, as I found by inspecting the last exhibit in Citizens’ operating budget summary (pdf).¹ The budget shows how increasingly severe hurricanes would affect the company’s financial statements. If a once-in-25-year storm hit, the carrier would post a net loss of $3.6 billion.

But the company has about $4.5 billion in capital! So the company is healthy!

OK, not really. In the cat reinsurance business, a once-in-25-year event is a yawner. It’s tragic for all the people at Ground Zero, but for a financially sound cat writer, it is not an event that would erode a company’s capital base. The company would lose money on the risks in that area, of course, but because those risks were diversified with other – profitable – catastrophe risks across the globe, the company would still post underwriting profits in the year a 1-in-25 event occurred.

To post a companywide loss for the year, you’d have to see a once-in-100-year event, or maybe a once-in-200-year event.

Right now, for example, reinsurers are posting loss estimates for first quarter 2011 – the Japanese earthquake, the New Zealand earthquake and the Australian floods – together a 1-in-100 event, maybe a 1-in-200. The events look likely to wipe out the year’s profits for some and for a very few it will be a “capital event” – one that eats into the capital base at year end.

A company that could lose 80% of its capital base from a 1-in-25 event would not be praised. In fact, it would be downgraded by any of the rating agencies.

But Citizens’ cat exposure is so great that even a 1-in-10 event would eat up about half of its capital (net loss for the year of $2.239B on an estimated surplus of $4.5B).

And a 1-in-100 event would leave it with a negative surplus of around $13 billion. That’s not a racehorse. That’s a plow horse.

How much is that? Well, the state’s 6% general sales tax raises around $19 billion a year. And when that bankrupting hurricane hits, those ‘weaker’ takeout companies will honor their obligations without dunning their own and every other policyholder in the state.

One final note: The article makes it sound like Citizens is getting healthier, since it can withstand a 1-in-25 storm. But that’s a bit of a statistical burp, as it is less able to withstand a 1-in-100 storm than it was a year earlier. And it’s at the 1-in-100 level that you start to learn something about an insurer’s health.

In 2010, a 1-in-100 storm would have led to a $14 billion net loss, eating up all the company’s capital three times over. This year, a 1-in-100 storm would lead to an $18.3 billion net loss, eating up all the company’s capital four times over.

It’s just that the sickly Citizens would succumb long before that.


¹ Is there another cat insurer in the world that looks at its PMLs last?


2 thoughts on “Citizens Property: A plow horse, as sick as ever

  1. Lou says:

    Great article, Jim

  2. […] Outpost has picked up my post about how Florida’s state HO insurer, Citizens Property, can’t remain solvent through a […]

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