Hints of continued assignment-of-benefits woes in Citizens' 2017 results

Losses stemming from Hurricane Irma do not appear to represent the only development that negatively impacted the 2017 results of Citizens Property Insurance Corp.

The Florida state-run insurer's statutory filing, which it posted recently on its website, also shows evidence of a significant drag from what President and CEO Barry Gilway has often described as an assignment-of-benefits crisis.

With just over $1 billion in net losses and loss adjustment expenses incurred from Irma, the first major hurricane to make landfall in Florida in 12 years, Citizens slumped to a net underwriting loss of nearly $1.17 billion in 2017 from a loss of $128.8 million in 2016. It marked Citizens' third consecutive annual net underwriting loss and by far its largest since 2005.

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Citizens' net loss and loss-adjustment-expense, or LAE, ratio swelled to 249.8% from 82.0% on a year-over-year basis. That, too, was by far the highest result the company had produced since 2005. Its combined ratio of 286.5% represented Citizens' highest annual result since the current iteration of the company was established in 2002, reflecting its markedly smaller premium base in 2017 relative to the previous two heavy catastrophe loss calendar years of 2004 and 2005.

Though the company's net loss ratio of 164.9% compared favorably to the results of 243.8% in 2004 and 227.5% in 2005, its net LAE ratio soared to an all-time high of nearly 85% from 26.7% in 2016. The highest annual net LAE ratio that Citizens had previously generated in a calendar year was 30.9% in 2005.

The 2017 annual statement did not offer specifics regarding the breakdown of Irma-related costs between losses and LAE, but Citizens has previously blamed higher relative amounts of litigated claims for driving up its LAE costs. When backing the $1 billion in losses and LAE from the hurricane out of the company's full-year results, Citizens' loss and LAE ratio still deteriorated by 7.7 percentage points on a year-over-year basis to 89.7%.

Alleged third-party abuse of the assignment of benefits by policyholders has led to a surge in litigated, nonweather-related water loss claims for Citizens and a number of other residential property insurers in the state. Citizens in December 2017 reported that the average severity of nonweather-related water claims closed during an 18-month period ended June 30, 2017, was 6.7x higher for claims of the sort with both attorney involvement and an assignment of benefits relative to those without either characteristic.

Several carriers, including Citizens, have blamed the situation for driving premium rates higher for Florida insureds particularly given the sharply higher costs typically associated with litigated claims. And they have warned that further rate increases would be necessary in the absence of legislative relief, which the industry has struggled to obtain in past sessions of the Florida legislature. Legislation seeking to address the situation passed Florida's House of Representatives in January in an 82-20 vote. A related Florida Senate bill was sent to the Rules Committee in February.

A review of the state page of the Citizens annual statement might offer the best glimpse into the potential impact of the assignment-of-benefits issue on the company's recent results. The homeowners multiperil line, which includes owner-occupied policies written on form HO-3, has been especially hard hit in that regard.

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Citizens' direct-defense and cost-containment expenses, or DCCE, incurred in the homeowners line increased to $74.9 million in 2017 from $70.1 million in 2016 at a time in which its premium base had been declining. As such, its ratio of homeowners DCCE incurred to direct premiums earned increased to 16.9% from 15.2% on a year-over-year basis. The company's average annual homeowners direct DCCE ratio in the first 13 full years of its existence in its current form was 2.9%. The ratio's previous high-water mark of 8.1% in 2013 came during a year in which Citizens recorded $45.3 million in adverse development of allocated LAE related to sinkhole claims.

Private Florida-focused residential property insurers have also continued to observe the negative effects of litigated claims with an assignment of benefits. Universal Insurance Holdings Inc., Florida's largest personal and commercial residential property insurer based on Sept. 30, 2017, policies in force, strengthened loss reserves for current and prior accident years during the fourth quarter of 2017 as a result of increased frequency of litigated claims. Heritage Insurance Holdings Inc. recently made headlines for attributing proposed rate increases in excess of 14% on average for two of its Florida homeowners programs to assignment-of-benefits abuse.

Should legislative reform remain in limbo, the situation may not improve materially in the near term. Universal, for instance, reported during a February conference call that approximately 12% of its more than 69,000 claims from Irma have "some sort of [assignment-of-benefits] connotations to them."