appears to have dodged a bullet from Florida's firstlandfall-making hurricane in more than a decade, but it has not been nearly asfortunate as it pertains to non-weather-related water losses.

Thecompany's losses and loss adjustment expenses incurred for the first half andsecond quarter of 2016 came in well ahead of budget, according to data revealedin conjunction with a series of board committee meetings Sept. 27. With the endof the third quarter quickly approaching, Citizens reported that it had paidout a small dollar amount of claims in the aftermath of Hurricane Hermine, buttroublesome water loss trends have not yet stabilized.

The Floridastate-run insurer said it has paid total indemnity of less than $284,000 andincurred expenses of less than $98,000 on the 827 Hermine-related claims it hadreceived as of Sept. 22. "A lot" of the claims reflected"noncovered damage" or did not reach the levels of the high hurricanedeductibles associated with the policies, said Chief Claims Officer Jay Adams.He estimated that only one claim the company has seen involves covered damagein excess of $25,000, and that resulted from a situation where fire destroyed apolicyholder's house.

Citizensreported that 603 of the Hermine claims came from policies in its personallines account, 190 from the coastal account and four from the commercial linesaccount. By geography, Pinellas and Pasco counties accounted for 248 and 141 ofthe overall claims tally, respectively. Adams noted that most of the damageoccurred north of Tampa, Fla., but the company received 25 claims from thesouth Florida county of Miami-Dade. Although Hermine did not make landfall anywherenear south Florida, the Miami area experienced "serious rain," andmany of the claims from that region reflect "leaky roof-type stuff,"Adams said.

WhileHermine may not materially impact Citizens' financial results for the thirdquarter, the company faces ongoing challenges associated with what itsexecutives have labeled a "true crisis" associated with theassignment of benefits on non-weather-related water claims. The company nowestimates that the average annual loss cost per homeowners policy due to waterperil will rise to $2,083 as of Sept. 30, 2017, from only $735 three yearsearlier as an increasing number of those claims are litigated, a processcharacterized by significantly higher loss severities.

Ananalysis of the company's June 30 financial statements finds that its lossadjustment expense ratio soared to nearly double its highest level in a secondquarter in at least the past decade.

Citizensreported 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 ratiorose relative to the year-earlier total and the budgeted amount as well, tonearly 31% from 27.9% in the first six months of 2015 and an expected 28.5%. Calculationsbased on the company's March 31 and June 30 financials indicate that Citizensproduced loss and loss adjustment expense ratios of 35.4% and 22.6%,respectively. The loss ratio compared favorably with the 37.2% result in thesecond quarter of 2015, but the loss adjustment expense ratio marked anincrease from 11.5% in the year-earlier period even as net premiums earned fell19.2%.

Forthe second quarters from 2006 through 2015, Citizens' loss adjustment expenseratio had topped out at 11.7% in 2012 and averaged 7.9% during that 10-yearstretch. The first-half loss adjustment expense ratio was also well aboveanything the company had produced in the comparable stretches of the previous10 years.

Citizensposted a net underwriting gain of $101.2 million for the first half and $13.5million for the second quarter as compared with $201 million and $38.9 millionin the respective year-earlier periods. It had budgeted for an underwritingprofit of $110.3 million in the first half of the year. Total policies in forceas of June 30 of 489,138 marked a decline from 598,646 on the same date in2015, but the company had budgeted for only 468,263 policies to be on its booksat that time.

CFOJennifer Montero during a meeting of the Citizens Audit Committee attributedthe higher loss adjustment expense ratio to increases in the projected numberof non-weather-related water claims going into litigation.

Followinga brief discussion of the results, one member of the committee lamented thatthe 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 houseremodeled."

Citizensis also mindful of the potential for the assignment of benefits issue tosurface with Hurricane Hermine claims. Adams expects to see those claims withthe associated legal representation "trickle in," and he explainedthe steps Citizens had proactively taken to contact claimants. A total of 327claims have already been closed, he added.