BRADENTON, Fla. – After Florida’s property insurer-of-last-resort announced its first loss in more than a decade, the state-run agency’s debt received an upgrade.
Citizens Property Insurance Corp.’s bonds were raised to AA from AA-minus by Fitch Ratings last week, highlighting the credit strength that stems from a disconnect between Citizens' losses and the revenues that support its debt.
The AA ratings reflect the access Citizens has to levy special tax-like assessments up to 10%, said Fitch analyst Karen Krop.
“The primary security and the ratings are derived from Citizen's ability to levy emergency assessments on nearly every insurance policy holder in the state for an unlimited duration and in an unlimited cumulative amount to pay debt service on the bonds,” Krop said.
In addition to the assessment base, which totaled $41.5 billion in 2015, Citizens has more than $7 billion of surplus that it is likely to tap to pay claims before using assessments.
Citizens is a nonprofit, tax-exempt government entity prohibited by Florida law from filing for bankruptcy.
It had $4.3 billion of outstanding bonds as of Dec. 31 that are also rated A1 by Moody's Investors Service and A-plus by S&P Global Ratings.
However, Citizens is sounding the alarm about a practice that threatens to increase its losses and make homeowner’s insurance unaffordable in a state where real estate development and sales drive the economy.
The practice involves non-hurricane-related water claims and repairs that led Citizens to post a $27.1 million net loss last year - the first since 2005 - despite minimal damage from only one major hurricane during that time.
Most of the losses are related to burst pipes and other kinds of leaks and repairs through what Citizens calls an abuse of “assignment of benefits,” which has resulted in “skyrocketing” claims and litigation costs, the agency said.
An AOB is a document signed by a policyholder that allows a third party, such as a water extraction company, a roofer, or a plumber, to “stand in the shoes” of the policyholder and obtain direct payment from the insurance company.
According to Citizens, contractors that accept AOBs assume the benefits afforded the policyholders but bear few of the responsibilities, which include cooperating with adjusters and reporting losses before repairs are made.
Each litigated claim raises the average claim cost by $20,000 or more, and the higher costs are passed on to policyholders.
“Every year, we rely on standardized, accepted actuarial principles to set our rates,” said Chris Gardner, chairman of Citizens Board of Governors. “Last year, the same principles that provided rate decreases to our customers in recent years translated into hikes for 84% of our policyholders.
“Without legislative changes, that trend will continue,” he said.
The percent of Citizens’ litigated water claims increased to 34% in 2015 from 20.7% in 2012, according to a legislative analysis.
During the same period, the percent of claims with an AOB agreement that were eventually contested in court rose to 55% from 9.7%, while the percent of litigated claims with AOB agreements from first notice of loss increased to 76.1% from 2.4%.
In December, the agency said that rising water claims and “out of control” litigation from AOBs would continue to chip away at its reserves and could result in policies returning to the state’s insurer-of-last-resort as private insurance companies face similar challenges.
“Without significant reform, litigation, water claims and AOB pose a serious threat to the financial position of Citizens,” Gardner said then. “This is not a sustainable situation.”
Between January and November 2016, the agency said 8,097 new lawsuits were filed against it – a 30% increase from the same period in 2015.
At the same time Citizens has shed policies.
Between January 2015 and November 2016, the number of policies serviced by Citizens dropped by 26.3% as part of an ongoing strategy to reduce risk that allows private companies to assume its policies.
The reduced exposure is a key rating driver, according to Fitch.
“Following low catastrophe losses over the past eleven years, Citizens' financial position is much improved with strong growth in claims paying resources,” Krop said. “In the event of storm-related claims, Citizens would draw on these expanded claims-paying resources first, before issuing bonds.”
However, the use of AOBs is widespread across the state, and has been prevalent in water and roof claims, according to the Florida Office of Insurance Regulation.
In the state’s 67 counties last year, there were 28,200 AOB-related lawsuits involving all property insurers, compared to 405 AOB suits in 2006, the OIR said, adding that rising loss trends impact profitability and rates.
In 2014, 63% of approved insurance company rate filings by the OIR were for a decrease or no premium rate change, but in 2016, 73% of approved filings were for rate increases.
Additionally, recent court decisions involving AOBs have reversed industry claim procedures, according to a financial firm specializing in evaluating and rating regional and specialty insurers.
“The assignment of benefits situation in Florida is unlike any other in the United States,” Columbus, Ohio-based Demotech Inc. said in February.
Demotech said it suspended previous guidance applicable to property insurers in Florida due to the judicial reversals of industry claims procedures, which remain intact in other areas.
“Additional concern was created on January 31, 2017 when the Florida Supreme Court decision overturned lower court rulings related to legal fees awarded to a law firm, whose fees had been capped in a claim bill authored by the Legislature in 2012,” Demotech said.
The court declared the cap on legal fees unconstitutional.
The losses incurred by Citizens and other insurers is a wake-up call that state lawmakers should pass reforms to end “rampant” AOB fraud, said the Consumer Protection Coalition, whose members include the Florida Chamber of Commerce, the Florida Bankers Association, insurers, and retail and real estate organizations.
Both Citizens and the coalition are supporting bills filed during the current legislative session that would address AOB claims and litigation costs.
Senate Bill 1038, they say, contains the most meaningful reforms, because it will help end AOB fraud and abuse by tightening benefit assignment regulations and capping attorney fees.
SB1038 has yet to be heard by its first committee, with just three weeks left in the Legislature’s annual session.
A similar measure, House Bill 1421, was passed by the Insurance and Banking Subcommittee March 14 and is waiting to be heard by the Commerce Committee.
Citizens Property Insurance Corp. was created in 2002 to provide coverage to property owners who cannot find it in the private insurance market due to limited underwriting capacity.
Citizens and the state-created Hurricane Catastrophe Fund are also designed to stabilize Florida’s insurance market, which has been rocked by private insurer insolvencies following major hurricane strikes.