The 2018 operating budget that Citizens Property Insurance Corp. President and CEO Barry Gilway will present to the state-run insurer's board of governors on Dec. 13 contemplates what would represent its largest year-over-year rise in policies in force on a percentage basis since 2011.
Citizens budgeted for 500,173 policies in force across its business lines at year-end 2018, which would represent an increase of 13% from the 442,639 policies the company projects will be in force as of Dec. 31, 2017. Its most recently reported actual policy count was 448,737 as of Oct. 31.
To the extent the year-end 2017 projection verifies, it would mark a sixth straight year in which Citizens' policies in force declined. They rose 14.7% in 2011 to a peak at a year's end of more than 1.47 million.
The board meeting materials say the budgeted increase for 2018 reflects Citizens' selection of a 50% probability to a "growth" scenario produced by the company's internal forecasting model.
"This scenario contemplates Citizens' policy count increasing as private market policies are nonrenewed at policy expiration with their current insurers," the company's presentation states.
Regarding the probability selection, the company expects "contraction of Florida's private market as a result of litigated claim activity, continuing challenges surrounding [alleged third-party abuse of the assignment of benefits] and the private market's capacity as a result of Hurricane Irma."
Citizens added, however, that the extent of the contractions and how many nonrenewed policies might get picked up by well-capitalized competitors in the private market is "unknown" at this point. It foresees "modest growth" of 21.3% in policies in force within the personal lines account but a decrease of 4.5% in the coastal account and a drop of 34% in commercial lines account, which is projected to include only 1,410 policies at year-end 2017. The company cited "a competitive market for commercial policies and wind-only business" for that outlook.
The 2018 operating budget represents the second consecutive year in which Citizens forecast a rise in overall policy count, but its 2017 operating budget missed the mark from that perspective. It called for an increase of 9% in policies in force to 504,202 from a projected year-end 2016 baseline of 462,592. Not only is the new year-end 2017 projection well below the budgeted count, the Dec. 31, 2016, projection was also 6,749 policies too high.
More-robust-than-expected depopulation activity contributed to the deviation between the budgeted and actual results. The 2017 operating budget called for only 9,173 policies to be removed through depopulation in 2017, down from a projected 2016 total of 53,141 policies. Citizens now projects that 36,061 policies will be removed through depopulation in 2017, and its 2018 budget calls for 17,517 to be depopulated throughout the year.
Losses from Hurricane Irma sent Citizens to a third-quarter underwriting loss of $1.11 billion, as previously reported by S&P Global Market Intelligence. But the 2018 operating budget offers several reminders that an event representing the second-largest claim-generating event in the company's history is not only its only challenge from a profit and loss perspective.
The assignment-of-benefits situation, which Gilway has often referenced as a crisis, is expected to continue to exact a toll on Citizens' underwriting results, particularly in the absence of state legislative reforms that the industry has aggressively pushed.
"Citizens' litigation rate on reported non-weather water claims is at unprecedented levels for calendar year 2017," the board meeting materials state. "While Citizens' has observed a concentration in the tri-county area (of Palm Beach, Broward and Miami-Dade), an area of significant exposure and concentration within the state for Citizens, current indications provide evidence of a slow expansion statewide."
The budgeted ratios of noncatastrophe losses and loss-adjustment expenses to direct premiums earned of 55.2% across all business lines and 76.8% in the personal lines account represent increases from projected full-year 2017 results of 47.8% and 70.6%, respectively.
"An anticipated litigation rate of 50% on all non-weather water losses within the [personal lines account is] the result of the challenging market conditions expected to persist throughout 2018," Citizens warns in the presentation.
The budget also contemplates continued efforts by Citizens to transfer coastal account risks through the purchase of private reinsurance coverage to supplement its participation in the mandatory layer of the Florida Hurricane Catastrophe Fund. Citizens is budgeting $100 million for that effort, up from a projected tally of $92.6 million in 2017, as it anticipates "a modest level of upward pressure" on reinsurance in the aftermath of recent catastrophe losses both in Florida and around the world.