July 18, 2005

For Citizens Property Insurance, the past 12 months have been a trial by wind.

Last June, the state-run pool of last resort was a makeshift insurer at best, with a skeleton staff, no adjusters to call its own, and no way of effectively managing claims from policyholders whose homes were wiped out by four massive storms.

In the past year:

• Citizens had been sitting on a pile of cash -- $1.3 billion in reserves to be exact -- to pay claims. But after the losses from the hurricanes were tabulated, it wasn't enough. The company ended the year with a $516 million shortfall, and all homeowners in the state will be assessed to make up that deficit.

• The company was scrutinized by a task force created by the state's chief financial officer to find ways to improve its operations. It has been lambasted by lawmakers and the public for its poor customer service and claims-handling after the storms. At one point, Citizens had racked up more consumer complaints with state regulators than any insurer in Florida.

• Some policyholders have taken Citizens to court, filing a class-action suit in Leon County circuit court and demanding the company pay full policy limits to cover the destruction of their homes. If the homeowners eventually prevail in court, Citizens will have to pay the difference up to their policy limits, approximately $70 million. It lost the first round.

Citizens has had no choice but to scramble and recast itself.

No longer a temporary fix, the company has taken on the trappings of a major insurer and hopefully adopted the structure needed to be a permanent remedy for Florida residents who can't find insurance in the private market. It has set up a catastrophe center in Tallahassee and a customer service center in Jacksonville, beefed up staff and plans to open regional offices with one in Miami set for later this year.

''We had to match what you find in the private market,'' said Robert Ricker, Citizens' president and executive director. ''That was one of the mandates of the new insurance law,'' which cleared the state Legislature in May.

In part, Citizens' plight was created by its original mandate.

Formed in 2002 from the combination of the old Joint Underwriting Association and the Florida Windstorm Underwriting Association, Citizens must write homeowners policies for Florida residents who can't find insurance in the private market.

With private market insurers avoiding writing policies in Central Florida for sink hole problems and a pullback after last year's storms, Citizens quickly ballooned to be the second-largest insurance company in the state, and now has about 740,000 policies. State Farm is the largest with more than 920,000 policies.

''The problem with Citizens is that it's concentrated in Florida. [The company] can't diversify. It has to absorb more risk and it can't spread its risk as much as other insurers do,'' says Pamela Peterson Drake, a professor of finance at Florida Atlantic University in Boca Raton.

''Citizens has the worst of everything. In the worst years, that's going to be a problem,'' Drake adds.

The company has started off the 2005 hurricane season with $225 million in surplus in its personal lines account, which provides standard coverage for fire, theft, and, in some cases, windstorm. Ricker says Citizens plans to set up a $600 million line of credit for this account to provide additional liquidity if needed.

For its high-risk account, which provides only hurricane coverage primarily for homes in coastal areas, Citizens expects to have $400 million in surplus, the funds it uses to pay claims. This amount includes making up the $516 million deficit later this year.

The company also maintains $2.1 billion in bond proceeds that it can use to pay claims in case this year's hurricane season gets out of hand.

Citizens expects a 23 percent increase in total premiums this year, due to an average 12.2 percent gain in its windstorm-only policy rates and 23 percent hike in its general homeowners policies.

Drake and other industry experts say Citizens needs a prolonged period with no hurricanes to rebuild its surpluses.

So far, Mother Nature isn't cooperating.

Last week, Citizens deployed 150 adjusters and set up two mobile claims centers, one in Milton and another in Destin, to begin handling claims from Hurricane Dennis, which hit the westernmost section of the Panhandle -- an area still recovering from Ivan's fury last year. By Friday, it still hadn't projected losses from the storm.

A CRITICAL CHALLENGE

Tom Gallagher, Florida's chief financial officer, said how well Citizens handles the claims from Dennis will be the test that determines whether or not the changes it had made so far really have helped the company operate more efficiently and responsively for policyholders.

''The proof will be in the pudding,'' says Gallagher.

Besides changes on the operations front, Citizens has worked to beef up its financial house, such as buying reinsurance in private market, which it hadn't bought last year. In addition to coverage from the Florida Hurricane Catastrophe fund, the additional reinsurance further reduces the losses the company must cover.

But one element hasn't changed. The company has 54 percent of its exposure in South Florida, the most developed, densely populated region of the state.

Its South Florida portfolio includes some of the most expensive and riskiest real estate in the state: 2,795 multimillion-dollar manses alone, plus more than 12,000 condominium buildings and more than 14,000 commercial properties.

Statewide, the company provides windstorm coverage for 21,189 properties worth more than $1 million. Twenty properties are valued between $40 million and $80.5 million.

Why?

Because Citizens' rates are cheaper than the alternative, says Phil Lyons, vice president of InSource, a South Miami insurance agency.

There are at least two private-market companies willing to cover these high-value properties. There's also some coverage in the surplus lines market. But these rates are negotiated on a policy-bypolicy basis and could be considerably higher.

Justin Glover, Citizens' spokesman, says the company wanted to have the new insurance law limit its exposure on multimillion-dollar properties. But the provision never made it to a final version of the bill before it was approved by the state Legislature.

Gallagher believes Citizens should work to help find coverage in the private market for these high-value properties. But if they can't find insurance elsewhere, that's why Citizens is the insurer of last resort.

BUILT-IN PROBLEMS

Further complicating Citizens' financial outlook are several built-in inefficiencies.

Bonds issued in 1999 cost Citizens nearly $34 million last year. The company has to pay a higher rate on the bonds than it earns from securities where it has the money invested.

At its March board meeting, four bond underwriters presented proposals to reverse this negative arbitrage and help Citizens conserve badly needed cash.

Don Griffin with the Property Casualty Insurers Association of America says Citizens' costs to handle claims will be higher than those of other Florida insurers, or the general industry.

For instance, Griffin pointed out that Citizens had to hire all adjusters it used to handle last year's storms. That's a hefty expense for Citizens. Regional and national insurers were able to redeploy adjusters from other states to help out in Florida.

'This type of difference has an impact on Citizens' performance,'' says Griffin.

Last October, Citizens estimated it would rack up about $165 million in administrative costs over a two-year period to resolve all the claims associated with the 2004 storms. That included setting up its Tallahassee catastrophe center, which the company said costs about $200,000 a day to operate.

However, Citizens' expensive program to entice companies to take over some of its policies is finally working.

So far this year, 250,000 policies have been removed, including 49,000 wind-only policies. Citizens has escrowed more than $73 million to pay bonuses if these companies keep these policies on their books for three years.

In the past year, Citizens has retooled its takeout program, tying bonuses to the amount of risk these companies are willing to assume. Takeout companies can earn bigger bonuses if they pick up policies that cover properties in Miami-Dade County and take policies from the windstorm pool.

Ricker says the start-up companies taking policies from Citizens are finding good business is up for grabs.

''We've tried to de-emphasize the bonuses and stressed that [these start-up firms] can come into the market, have instant cash flow and a book of business. We save them the acquisition costs,'' says Ricker.

Citizens knows its restructuring work isn't done.

The company will bring the issue of limiting exposure, perhaps being allowed to rid itself of some expensive property it covers, back to the Legislature next year, Ricker says.

But Citizens has made some progress.

Daniel Baptista, a Miami independent agent and a member of the task force that reviewed Citizens' operations, says the company has worked to improve its claims-handling operations. Complaints are down and claims are being processed faster.

Commissions for agents -- a sore point in the past -- were increased, though they remain below what private carriers pay.

Citizens also has taken over the administration of a program that helps homeowners find private insurers for coverage -- a plus because it helps keep a potential policy off its books. Baptista, who is one of the agents working with Citizens on this program, says it will be automated in future months.

''Time will tell'' how well these changes work, says Baptista.