Florida’s Citizens Property Insurance Moves Forward with Surplus Notes Depopulation Program; CEO Barry Gilway Cuts Back Corporate Travel Allowances

Sep 7, 2012

At its meeting today, September 7, 2012, Citizens Property Insurance Corporation (“Citizens”) Board of Governors (“Board”) agreed to move forward with a Surplus Notes Depopulation Program (“Program”) that would allow the state’s largest insurer to loan private insurers $300 million in incentives to take over existing Citizens policies for a minimum of 10 years.

To view the meeting materials, click here

The measure, aimed at removing 350,000 policies from Citizens’ cache of 1.4 million policies, was approved in concept.  Board members agreed Citizens’ Depopulation Committee would have the opportunity to review final loan documents before they receive the Board’s final stamp of approval.

Under the plan, Citizens would invest $300 million–20 percent of its Personal Lines Account surplus and a maximum of $50 million from the Coastal Account–in a risk-based loan program to private insurers.  The program would apply only to personal residential policies, which would be assumed by other insurers that would get 20 years to pay back the surplus notes loans at low rates of interest.

To otherwise reduce its Probable Maximum Loss (“PML”) by the same amount through private reinsurance, it would cost Citizens approximately $240 million each year, according to Citizens staff reports.

Board member John Rollins referred to the program as “very strong” but in its “embryonic stage,” saying it has the potential to spark “a renaissance” in the insurance industry.

Board member Carol Everhart said the program made her nervous and wanted to be certain it would be vetted by outside counsel.  Citizens’ General Counsel Dan Sumner assured her it would be, and noted that outside counsel would make sure the loan program does not affect Citizens’ tax-exempt status.  The program’s basic mechanics also would be reviewed.

Board member Chris Gardner called the program a “huge opportunity,” and said his objective would be to get the program fully subscribed.

“If we get this opportunity to make this level of a loan, I just simply think the opportunity is too great to pass up.” 

However, Board Chairman Carlos Lacasa was more reserved in his assessment.  He suggested that the Board require private insurers to pay Citizens a market rate interest rate for the second 10 years of the surplus notes loan in order to eliminate some risk.  If private insurers retain the policies they assumed longer than 10 years, they could retain the initial low interest rate they received, he said.

“I am wearing the hat of fiduciary of this company and we have to make sure the deal works,” Chairman Lacasa said.  “Frankly, if they don’t want to pay a higher rate of interest, then keep the policies.  If they don’t keep the policies, we at least have an investment.”

Citizens President and CEO Barry Gilway disagreed, saying the program benefits are so “substantial” such a measure might “de-incentivize” an insurer.

“The interest rate relative to the note is really not a relative indication,” Mr. Gilway said.  “I believe this transaction is about paying ‘x’ amount of money to eliminate ‘x’ amount of risk.”

Chairman Lacasa requested that the matter be put to a Board vote.  The measure failed.

He also urged the Board to support a measure that would have placed limits on the loan amount to a single company.  During a Board vote, the measure failed.

An indignant Senator Mike Fasano, who had telephoned into today’s Tallahassee-based meeting to voice his disapproval, called the loan program a  “bailout” for the insurance industry.  He blasted the Board for moving forward with a program that required private insurers to put up no risk to get $300 million in loans.

“Why should taxpayers have to put out the money for an incentive that should not have to exist?” Senator Fasano asked.

“If this is going to move forward, you better watch the cherry-picking,” Senator Fasano warned.  “Don’t trust the insurance industry.”

The measure passed unanimously in a Board vote to move forward with the program.


President’s Report

In the wake of negative media accounts of the corporate spending of Citizens top executives, President Gilway outlined a revamp of the company’s travel policy that would limit spending on meals and hotels in town, out-of-state and overseas.

President Gilway prefaced his comments by acknowledging that the corporate travel program had recently come under “enormous fire,” thus spurring the need for change.

“I have decided to introduce changes to that policy immediately that recognizes we are a public institution, and taxpayers and policy holders appropriately expect us to spend their money in very conservative manner,” President Gilway said.

Citizens’ executive policy is discontinued immediately and a single travel and expenditure policy – applicable to all Citizens employees, replaces it, he said.

He said the executive policy was based on two words – “reasonable” and “appropriate”–and, as such, new spending limits will be established.  While past expenditures were commonplace in the private sector, he acknowledged such spending is not accepted in the public sector.

A summary of the travel policy and allowed expenditures follows:

In-state travel:  

  • $60-per-day meal allowance: Breakfast, $10; Lunch, $15; Dinner, $25
  • Hotels can only be reimbursed for single occupancy, with a maximum daily rate of $150, conforming to the state hotels reimbursement policy

Out-of-state travel:

  • Daily meal allowance dictated by date and city of travel as outlined by the U.S. General Services Administration (“GSA”)
  • Hotels: Maximum rate shall not exceed 20 percent more than the US. General Services Administration rate as dictated by date and city of travel available at the GSA Web site. If the room rate is more than 20 percent higher than the GSA rate, justification requiring approval from multiple sources is required prior to travel. Neither Citizens nor State of Florida employees are eligible to receive the federal government rates

International travel:

  • Daily meal allowances will follow the U.S. Department of State foreign rate allowance for meals and incidental expenses as dictated by date and place of travel available at www.state.gov
  • Maximum rate for hotels may not exceed the stated U.S. Department of State Foreign travel rate allowance as dictated by that same Web site. If a room rate is 20 percent more than the allowable rate, justification through multiple quotes and prior approval are required.

“These are stringent requirements.  We do have the control mechanisms in place to move ahead and implement and monitor these controls,” President Gilway stated.

Ms. Everhart suggested Board members follow the same guidelines as Citizens employees.  Board member Don Glisson suggested they use their own credit cards for expenses and then get reimbursed.

Chairman Lacasa said they will study the matter and revisit it at another time.

Citizens will also be examining its corporate card program to determine who should retain such cards, President Gilway added.  Additionally, Citizens will be conducting an overall audit of expenses and standards.    The chief inspector general of Florida Governor Rick Scott’s office also will be conducting a review of travel expenses, he said.

President Gilway further noted the need for a “very, very comprehensive, organizational review,” explaining that, with the pending transfer of thousands of policies to the private market, Citizens needs to scale its organization rapidly.

Technology-related improvements are also reducing the need for many business processes, further creating a need for scale, he said.

His message was clear:  Citizens needs to downsize.

Outsourcing practices and the numerous tiers of management within Citizens will be examined, President Gilway said.

To get the job done, President Gilway asked the Board for authority to proceed with a Request for Proposal (“RFP”) that would provide professional talent and objectives relative to an organization review.  The Board unanimously approved the RFP.

President Gilway also requested that the Board approve changes in the employee benefit and compensation plans for 2013, which include the application of a three percent merit plan and a revision of the benefits package.  Cost of the merit plan is approximately $2 million, he said.  The Board unanimously approved the changes.

In other business:

Christine Ashburn, Citizens’ Director of Legislative and External Affairs, updated the Board on a recent survey of 500 Citizens policyholders and 500 non-Citizens policyholders that focused on their knowledge of Citizens’ insurance costs.

Survey results showed:

  • 79 percent of Citizens policyholders and 89 percent of non-Citizens policyholders were not aware they could be charged an assessment if Citizens was unable to pay its claims.
  • 48 percent of Citizens policyholders believe their insurance premium is not the total cost of their insurance. 52 percent of non-Citizens policyholders believe their insurance premium does not reflect the total cost of their insurance.
  • The majority of both Citizens and non-Citizens policyholders did not know Citizens can assess other carriers if unable to pay its claims.
  • Citizens policyholders indicated premiums should be kept artificially low even though it would increase the likelihood that other carriers would be assessed to recoup the deficit.
  • Conversely, non-Citizens policyholders strongly supported raising premiums on Citizens policyholders to a fair market rate to reduce the likelihood other companies would charge their policyholders.

Ms. Ashburn also outlined a comprehensive communications plan that is underway, aimed at providing better information on all fronts to policyholders, agents, media, non-Citizens policyholders, the general public and staff.  The plan will involve revisions of the Web site, brochures and an array of other informational tools, she said.

In regard to questions about mobile home coverage issues involving car ports and screened enclosures, General Counsel Sumner gave the following report:

He explained that there are strict statutory and contractual obligations between a mobile home community and the renters in the community.  A prospectus outlines the obligations of both parties, detailing the amenities the developer must maintain and the upkeep the renters must provide, he said.  However, such documents, filed with Florida’s Department of Business and Professional Regulation, are extremely difficult to change, he noted.

Two common improvements made by renters are the addition of attached carports and attached screen rooms, both of which are excluded from coverage by Citizens.  Nevertheless, a developer requires the renter to maintain those amenities or face eviction, causing a dilemma for the renter if those structures are damaged by storms, Mr. Sumner said, adding that Citizens is not legally obligated to provide the coverage, but nothing would legally prevent Citizens from covering those items.

Ms. Everhart urged the Board to review the matter and find ways to possibly put the coverage back in to place.  Board members unanimously voted to review the matter.

Citizens’ Senior Director of Insurance Operations Eric Ordway updated the Board on a mitigation re-inspection program that was initiated on August 17, 2012.  He explained that Citizens is offering policyholders free re-inspections to help resolve disputes, evaluate new wind-resistant features and access previously blocked attics. 

Second inspections must be conducted within 12 months of the original inspection.  Any mitigation credits slated for removal as a result of the first inspection will be deferred until after the second inspection.

Chief Financial Officer Sharon Binnun provided the Board with summary updates of recent sinkhole reports, investment reports and policy updates.

The Board also approved the following expenditures:

  • $950,000 for technology infrastructure, including servers, storage and network
  • $340,000 for computers, monitors, printers and ancillary items
  • $720,000 for migration planning services
  • $1,062,000 for janitorial services in Tallahassee and Jacksonville
  • $100,000 for organizational review
  • $9,246,000 for staffing services through December 2012

With no other business to consider, the meeting was adjourned.


Should you have any questions or comments, please contact Colodny Fass& Webb.


Click here to follow Colodny Fass& Webb on Twitter (@CFTLAWcom)



To unsubscribe from this newsletter, please send an email to Brooke Ellis at bellis@cftlaw.com.