The idea to privatize Citizens Property InsuranceCorp.,  tossed out at a recent board of governors'meeting, continues to draw attention. On July 13 the 8-member boardmet in Naples as part of its regular schedule of meetings atdifferent venues across the state. 

During a presentation by Citizens' CEO Scott Wallace, as both heand Board Chair James Malone voiced concern about the carrier'scontinued growth, Malone surprised many listeners by saying, "Ithink we ought to really consider privatizing a substantial portionof Citizens. A base of about 800,000 customers who need an insurerof last resort with billions of dollars in assets, thousands ofcustomers, and a nice premium base, should have value somewhere inthe marketplace."

Malone has served as board chair since his appointment to thatpost by then-CFO Alex Sink. He is the founding managing partner ofNaples-based Qorval LLC, an investment banking, financial advisory,and turn-around firm, and chairman of Boyne Capital Partners. Hesays that the guidelines under which Citizens operates from alegislative and administrative standpoint simply do not work."Think about it for a moment," he said at the meeting. "You havethis huge concentration of risk at under-market price, under-marketvalue.

"The state of Florida needs money and this could be turned intoan asset that had a value that people were willing to purchase inthe private sector," Malone added. "If we take a segment ofCitizens, make it a private company, then that takes it out of thelegislative process, depending on what the market thinks somethinglike that is worth. I am out of ideas as to how to lower the riskto the citizens, the population of Florida, and not have this trainwreck coming at us. I would like to officially kick that off as anidea in the public sector, get some input," he said.

"My experience would say that any organization that has 1.4million customers, that has a premium revenue stream of close to $3billion a year and a nice chunk of liquidity sitting on its balancesheet, potentially has some value to the private world," Maloneadded. "We owe it to the state to see if it's a viable option."

The state—in the form of Gov.Rick Scott—quickly jumped in. Asked for comments on Malone'sstatements by reporters in Tallahassee, Scott said, "If looking atthings like privatizing Citizens is something that would help drivedown the cost of insurance in our state, then I want to look at itvery closely."

The governor has long been accused of trying to shutter thestate-created insurer. He has repeatedly brushed off thoseaccusations while conceding that he does want to drastically reduceCitizen's footprint in the state's insurance market.

Republican Sen. Garrett Richter, chair of the chamber'sinsurance committee (who, like Scott and Malone, owns a home inNaples), also says he "would be absolutely open to thediscussion.

"One would think a company that is growing and has that manypolicyholders, would be attractive to somebody to come in and takeit over, but you'd have to be able to charge an actuarially soundpremium," Richter added. "It's been my objective and desire toreturn Citizens to the insurer of last resort, but as long as wehave artificial premiums that continues to be a hugechallenge."

Richter was the chief architect of a massive property insurancebill (SB408) passed in the 2011 legislative session and signed byScott. A recipient of the FloridaInsurance Council's Harry G. Landrum Outstanding LegislativeLeadership and Distinguished Service Award in both 2009 and 2011,Richter's support is seen as crucial for Malone's idea to gainmomentum.

Growth and Challenges

CEO Wallace told the board that Citizens is experiencing anaverage weekly growth rate of 4,200 additional policies. "Certainlyfrom Citizens' perspective, the Florida marketplace is notimproving," he said. He predicted that the fast-pacedgrowth will not stop "in the foreseeable future" withoutsignificant changes in the insurance market.

Citizens' Chief Insurance Officer Yong Gilroy told the boardthat least four categories of policies will likely not bedepopulated anytime soon: Coastal Account policies (formerly theHigh-Risk), sinkhole, older mobile homes, and buildings 50 years orolder.

While advocates of the sell-off concede that up to 900,000Citizens' policies may be uninsurable in the private market, theycontend that the other policies are marketable. However, ifCitizens depopulates and the voluntary market elects not to capturethe those policies, they presumably would end up in the surpluslines market.

Now the Good News

According to a report from Citizens' CFO Sharon Binnun at thesame meeting, in the last three years Citizens' net assets havegrown from $3.1 billion at the end of 2008 to $5.4 billion at endof the first quarter of 2011. She added that Citizens has anadditional $575 million to reduce assessments in the event of ahurricane this year, thanks to its recent purchase of privatereinsurance in addition to its coverage from the Florida HurricaneCatastrophe Fund.

In other favorable news—this coming two days after the boardmeeting—Spokeswoman Christine Turner Ashburn announced thatCitizens had closed on a $900 million pre-event bond financing forthe Coastal Account and "is better prepared financially to paypolicyholder claims in the event of a hurricane or hurricanes thatimpact the state."

According to the media release, Citizens now has over $16billion in claims-paying ability for the 2011 hurricane season.Additionally, Standard & Poor's has revised its outlook fromnegative to stable for Citizens' Coastal Account and confirmed itsA+ rating on outstanding Citizens bonds.

Past and Future

Citizens became operational in August 2002 following approval atthat year's legislative session. The brainchild of then-Treasurer& Insurance Commissioner Tom Gallagher, it merged the FloridaWindstorm Underwriting Association, which provided wind-onlycoverage to nearly 410,000 coastal residents, with the FloridaResidential Property and Casualty Joint Underwriting Association,which covered approximately 110,000 consumers in need ofresidential or commercial property coverage.

Intended as an insurer-of-last-resort, critics have increasinglybemoaned its growth (it is now the largest private homeowners'coverage insurer in Florida, with 1.39 million policyholders) andits rates (kept low by legislative fiat). Citizens is required bystatute to annually increase rates by no more than 10 percent perpolicyholder until rates are determined to be actuarially sound. Amove backed by Gov. Scott to increase Citizens' ability to raisepremiums by more than 10 percent a year did not pass legislativemuster this past session.

Some see Malone's idea as a "last hurrah" as he and his sevenfellow fellow board members all reach the ends of their currentterms on July 31. Board members are appointed by the governor, theCFO, the Senate President, and the House Speaker. Each personappoints two board members, (one serves a 3-year term, the other a2-year term). From those eight members, the CFO appointsthe chair. The officials have until Aug. 1 to either reappointcurrent members or appoint new ones, Ashburn says.

Is Malone's idea indeed a "last hurrah," or a bid to remain onthe board and see his idea to fruition? Ashburn says that no boardappointments have yet been received by her office. When asked todayabout his appointment plans, Scott's office did not respond.