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Fla. property market 'slow-motion train wreck' may trigger Citizens repopulation


Date: February 13, 2017
Source: S&P Global


Long after Citizens Property Insurance Corp. sounded the alarm about the emergence of issues associated with the assignment of benefits in certain parts of Florida, the situation increasingly threatens the progress made in recent years within the Sunshine State's property insurance market.

Florida Insurance Commissioner David Altmaier warned a meeting of Gov. Rick Scott's cabinet on Feb. 7 that the state "could have an availability crisis coming" for property insurance "if we don't already have one" in remarks that came one day after Demotech Inc. took the unusual step of suspending its previously written guidance applicable to property insurers writing in Florida.

Citizens is expecting its policies in force to increase in 2017 after five consecutive years of decline, in large part due to fallout from the assignment-of-benefits issue.

The company's 2017 budget contemplates that rising loss ratios among private insurers from the resulting rise in litigated water claims is likely to reverse what had been a downward trend in its personal residential policy count. Florida CFO Jeff Atwater, who likened the situation to a "slow-motion train wreck," warned at several points during the cabinet meeting of a "risk of repopulating Citizens."

Altmaier explained that the ability of private carriers to withstand catastrophic events in a state subject to hurricane risk depends on their ability to build surplus and procure reinsurance coverage.

Net income among Florida domestic property companies, not including Citizens, was running well behind the full-year 2015 pace through the first nine months of 2016 in a performance that Altmaier characterized as "not good," and he noted that those results did not include the impact of Hurricane Matthew from October 2016.

"There was an extraordinary drop," he said. "When they're not successful from an operational standpoint, it hinders their ability to build policyholders' surplus, to procure reinsurance to protect their policyholders and to ultimately lower rates for consumers, which are three things we would expect the industry to do during times of profitability."

Altmaier said people might be inclined to react by saying, '"The insurance industry is losing money? Well, boo-hoo.'"

But he said the extent to which profitability has deteriorated is "alarming," and the impact on consumers could be significant.

Some companies have already determined that they can no longer operate in certain zip codes particularly in southeast Florida due to assignment-of-benefits-related concerns, Altmaier said, causing them to close off their books in those jurisdictions to new business.

The department also has seen an uptick in the number of rate increases filed by property insurers relative to rate decreases, and Altmaier expects consumers to "begin to see significant rate increases."

To the extent the difference between the rates charged for the same risk by private carriers and Citizens begins to widen, he cautioned, business could resume flowing into the state-run company given that its ability to hike rates is limited by a statutorily imposed glide path.

Altmaier pledged to work toward legislative solutions to the assignment-of-benefits issue, and he warned that "prices will go up" in the absence of a fix. Demotech's action reinforced the urgency of the situation from the perspective of carrier capitalization as it stated that "some carriers face potential downgrades" absent their ability to "make necessary enhancements to balance sheets."

The rating agency described Florida's assignment-of-benefits issue as "unlike any other in the United States" and expressed particular concern about the impact of three judicial rulings in recent months on carriers' execution of their business plans.

"Every carrier that met each aspect of the previously applicable, now suspended, guidance can focus on addressing [the assignment-of-benefits issue] and the implications of [certain of the judicial rulings] on its business model," Demotech said.

For those that had been "asked to infuse additional capital," Demotech added that some would benefit from the application of Statutory Statement of Accounting Principles No. 72, which allows them to address financial matters subsequent to year-end so long as it does so prior to the March 1 annual statement filing deadline.

Demotech said it rates, reviews and follows 57 property insurers in Florida. It did not identify those that may be at risk of a downgrade. A review of forthcoming annual statements for the amounts and timing of any infusions of paid-in capital might offer some clues relative to the rating agency's not-so-subtle suggestions.

Solvency concerns among Florida property insurers are nothing new if entirely unwelcome. Several carriers were placed into receivership in the late 2000s and early 2010s, contributing to a buildup in the overall size of Citizens' book that peaked in terms of policy count in November 2011.