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Citizens' ongoing non-weather water woes overshadow Hermine claims


Date: September 27, 2016
Source: SNL Financial
Author:  Tim Zawacki


Citizens Property Insurance Corp. appears to have dodged a bullet from Florida's first landfall-making hurricane in more than a decade, but it has not been nearly as fortunate as it pertains to non-weather-related water losses. The company's losses and loss adjustment expenses incurred for the first half and second quarter of 2016 came in well ahead of budget, according to data revealed in conjunction with a series of board committee meetings Sept. 27. With the end of the third quarter quickly approaching, Citizens reported that it had paid out a small dollar amount of claims in the aftermath of Hurricane Hermine, but troublesome water loss trends have not yet stabilized. The Florida state-run insurer said it has paid total indemnity of less than $284,000 and incurred expenses of less than $98,000 on the 827 Hermine-related claims it had received as of Sept. 22. "A lot" of the claims reflected "noncovered damage" or did not reach the levels of the high hurricane deductibles associated with the policies, said Chief Claims Officer Jay Adams. He estimated that only one claim the company has seen involves covered damage in excess of $25,000, and that resulted from a situation where fire destroyed a policyholder's house. Citizens reported that 603 of the Hermine claims came from policies in its personal lines account, 190 from the coastal account and four from the commercial lines account. By geography, Pinellas and Pasco counties accounted for 248 and 141 of the overall claims tally, respectively. Adams noted that most of the damage occurred north of Tampa, Fla., but the company received 25 claims from the south Florida county of Miami-Dade. Although Hermine did not make landfall anywhere near south Florida, the Miami area experienced "serious rain," and many of the claims from that region reflect "leaky roof-type stuff," Adams said. While Hermine may not materially impact Citizens' financial results for the third quarter, the company faces ongoing challenges associated with what its executives have labeled a "true crisis" associated with the assignment of benefits on non-weather-related water claims. The company now estimates that the average annual loss cost per homeowners policy due to water peril will rise to $2,083 as of Sept. 30, 2017, from only $735 three years earlier as an increasing number of those claims are litigated, a process characterized by significantly higher loss severities. An analysis of the company's June 30 financial statements finds that its loss adjustment expense ratio soared to nearly double its highest level in a second quarter in at least the past decade. Citizens reported a loss adjustment expense ratio of 16.1% for the first half of 2016, up from 10.2% in the year-earlier period and the 10.3% budget. The loss ratio rose relative to the year-earlier total and the budgeted amount as well, to nearly 31% from 27.9% in the first six months of 2015 and an expected 28.5%. Calculations based on the company's March 31 and June 30 financials indicate that Citizens produced loss and loss adjustment expense ratios of 35.4% and 22.6%, respectively. The loss ratio compared favorably with the 37.2% result in the second quarter of 2015, but the loss adjustment expense ratio marked an increase from 11.5% in the year-earlier period even as net premiums earned fell 19.2%. For the second quarters from 2006 through 2015, Citizens' loss adjustment expense ratio had topped out at 11.7% in 2012 and averaged 7.9% during that 10-year stretch. The first-half loss adjustment expense ratio was also well above anything the company had produced in the comparable stretches of the previous 10 years. Citizens posted a net underwriting gain of $101.2 million for the first half and $13.5 million for the second quarter as compared with $201 million and $38.9 million in the respective year-earlier periods. It had budgeted for an underwriting profit of $110.3 million in the first half of the year. Total policies in force as of June 30 of 489,138 marked a decline from 598,646 on the same date in 2015, but the company had budgeted for only 468,263 policies to be on its books at that time. CFO Jennifer Montero during a meeting of the Citizens Audit Committee attributed the higher loss adjustment expense ratio to increases in the projected number of non-weather-related water claims going into litigation. Following a brief discussion of the results, one member of the committee lamented that the assignment of benefits issue has escalated to the point where customers can "turn on the faucet, go to the mall, come back and get your house remodeled." Citizens is also mindful of the potential for the assignment of benefits issue to surface with Hurricane Hermine claims. Adams expects to see those claims with the associated legal representation "trickle in," and he explained the steps Citizens had proactively taken to contact claimants. A total of 327 claims have already been closed, he added.