Actuarial Outpost has picked up my post about how Florida’s state HO insurer, Citizens Property, can’t remain solvent through a substantial storm. The very sensible Outpost question – what about the investment income?
Unfortunately, as this snip from the 2011 budget (around page 12 of this pdf) shows, Citizens posts net investment losses:
That line that says assessment refers to a 1.4% surcharge to cover the last time Citizens went bust, in 2005. More about that in a minute.
The insurer is paying off its loans at interest rates between 1.28% and 5.3074% – not bad, but you can’t get that on short-term paper these days. I glanced at Schedule D of the 2010 Annual Statement (pdf), and it looks like the majority of the bonds Citizens holds mature in less than a year, which you’d expect from an organization that needs all its surplus handy for the Big One.
Unfortunately, the bulk of what Citizens owes is due after 2015, as Outposter silverfox documented. So Citizens is borrowing long and investing short, which is a hard way to make money.
But if the Big One hits, they apparently won’t be borrowing more. Poking around a bit more on the Citizens web site, I found this 2009 presentation to rating agencies that says “Post‐event bonding unlikely for Citizens even in a 1‐100 year loss scenario.”
The statement appears to reflect Citizens’ “sales-tax like assessment capability” – their words, not mine – on most insurance premiums in the state for 30 years. But I don’t see how that would keep them from borrowing to make sure they had the cash to pay claims. Knowledgeable comments would be welcome.
As for me, I’ll take them at their word. You don’t lie to the rating agencies.
Of course, Citizens’ PMLs have been rising, as I said a couple of days ago. In the presentation to the ratings agencies the 1-in-100 event storm was $13.9B then (slide 30). Now it is over $20B gross and about $17B net, according to this presentation (pdf) the insurer made to the state House Banking Committee in January. Here’s a nifty snip from slide 23 showing how a 1-in-100 storm would be paid for:
Paying for it
(HRA is high-risk wind. PLA and CLA are personal and commercial accounts that have less wind exposure.)
As you can see, surplus gets depleted first. For the rest, the Florida cat fund (FHCF) steps up, then Citizens customers get dunned, followed by the assessments.
Of course, if the storm hits, say, this year, there will be another round of assessments on top of the ones from 2005. And the underlying rates could rise too, so Floridians would be paying for the last two storms while buying insurance against the next one. Sounds expensive to me.
I prefer the system where you pay premium up front. Then, if tragedy strikes you are covered – not taxed.