Florida Citizens Depopulation Committee Discusses Hiring Outside Evaluation Firm for Surplus Notes Depopulation Program

Oct 9, 2012


The Citizens Property Insurance Corporation (“Citizens”) Depopulation Committee (“Committee”) met today, October 9, 2012, in Orlando.  The main purpose of the meeting was to review Citizens’ proposed Surplus Notes Program (“Program”) and receive public testimony on it. 

Committee Chairman Chris Gardner called the meeting to order.  He stated that the Program would dedicate a maximum of $350 million to support the assumption of policies from Citizens to the private market.  The Program could shrink Citizens policies by 25 percent.  Chairman Gardener stated that Program has been discussed in concept since the spring of 2012 and been vetted by Citizens’ staff, financial adviser and outside legal counsel.

Chairman Gardner noted that some elected officials, such as Florida House Speaker Designate Will Weatherford and Chief Financial Officer Jeff Atwater, had expressed concern about Program.  In an effort to maintain support for the Program, Citizens will need to address their concerns.  In order to shrink Citizens’ liability prior to the 2013 Hurricane Season, Citizens needs to begin to implement the program sooner, rather than later.

In a statement to the Committee members, Citizens President and CEO Barry Gilway announced that Citizens’ staff would recommend that the Program not be presented to Citizens’ full Board of Governors (“Board”) at its October 19, 2012 meeting.  Mr. Gilway stated that the Program would undergo a comprehensive financial review and study by an outside financial advisor.  He also stated that Citizens would hold meetings with interested parties to answer any outstanding questions or concerns about the Program.  Mr. Gilway also moved that the Committee approve an emergency procurement of a financial advisor to perform the review of the Program.  He noted that Goldman Sachs or another firm approved by the Board would conduct the review.  

President Gilway noted that he remains hopeful that the Program will be presented to the Board at the December meeting and that it will be implemented in advance of the 2013 Hurricane Season.

Citizens’ Chief Financial Officer Sharon Binnun presented an update on depopulation activities.  She noted that a large number of policies had been removed from Miami-Dade, Broward and Palm Beach counties. 

Ms. Binnun presented an overview of the proposed Program, noting that its goal is to take policies from Citizens and keep them out of Citizens.  The Program applies only to personal residential policies.  Citizens will dedicate $350 million to the Program ($300 million from Citizens’ Personal Lines Account and $50 million from its Coastal Account).  The maximum amount a company can receive from the Program is $50 million.  The amount of the surplus note is calculated as a function of four times the Florida Hurricane Catastrophe Fund premium for each policy assumed.  Further, each surplus note must result in the assumption of policies with a total insured value of $5.5 billion. 

Citizens General Counsel Dan Sumner presented the surplus note assumption term sheet.  Mr. Sumner pointed out that the term of the surplus note is 20 years, while the term of the agreement runs until the satisfaction of the surplus note or completion of an insurers’ obligations under the agreement, whichever occurs last. 

Mr. Sumner noted that an insurer would have an obligation to retain assumed polices for 10 years and, for the first three years, the 10 percent rate Glide Path applies to assumed policies.  He stated that an insurer can cancel a policy for non-payment of premium, fraud, or material misrepresentation, and that Citizens’ staff is still formulating language that might allow for an insurer to non-renew a policy if the policy limits have been paid.  Assumed polices that are cancelled or nonrenewed must be replaced with similar policies according to stringent guidelines set forth in the term sheet.

To participate in the Program, an insurer must have and maintain:

  • Minimum surplus of $25 million and a risk-based capital ratio of 300 percent, or surplus of $20 million and a risk-based capital ratio of 400 percent;
  • Reinsurance to cover on a 1-in-100 year probable maximum loss (“PML”) event and at least one reinstatement;
  • Reinsurance to cover two 1-in-10 year PML events in a single season;
  • Cash, plus total invested assets at least equal to total liabilities; and
  • Total liabilities-to-surplus ratio of less than 3 to 1.

The proceeds from the Program must be kept in a segregated fund and may only be used for surplus, reinsurance on assumed policies, or to pay policyholder claims, and may only be invested in U.S. government obligations or certain short-term, high-quality securities. 

Mr. Sumner also explained the Program’s forgiveness provision, which also is called “hurricane risk-sharing.”  For the first five years of participation with the Program, Citizens will share the hurricane risk on assumed policies for any named hurricane making landfall in Florida.  Citizens will forgive the surplus note principal in proportion to the insurer’s losses on assumed policies to losses on its total book of business multiplied by the insurer’s net paid losses up to a maximum of 20 percent of the principal for a single event.

During public testimony, a letter from Mr. Walter Dartland, Executive Director of the Consumer Federation of the Southeast, was read into the record.  Mr. Dartland’s letter stressed the importance of the Program and urged Citizens to take advantage of the opportunity to implement it. 

Robin Westcott, Florida’s Insurance Consumer Advocate, addressed the Committee and stated that the Committee is doing the right thing by hiring a third party to evaluate this important Program.  She noted that this is a complex Program and a thorough evaluation will help establish a solid Program.  Ms. Westcott had met with Mr. Gilway and she felt most of her questions regarding the Program had been addressed to her satisfaction.  She urged the Committee members to use her letter as a guidepost in the third-party evaluation.

Committee member Nancy Baily voiced her desire to see the Florida Market Assistance Program “reinvigorated.”  Ms. Baily stated that she thinks that program could be used to keep policies out of Citizens.

Ms. Binnun set forth a timeline for when the Program might be rolled out.  She stated that, subject to the timing of the third-party evaluation and approval by the Board, the Program might begin in January or February 2013.  Participating insurers will need to meet requirements and be approved by the Florida Office of Insurance Regulation.

With no further business, the meeting was adjourned.


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