Florida's largest property insurer is showing little signs of getting smaller anytime soon.

Whether it is due to the ongoing stalemate over State Farm Florida or a recognition that only the riskiest policyholders remain enrolled, it looks like Citizens Property Insurance Corp. will keep at least one million policyholders for some time.

Just one year ago, Citizens shed nearly 400,000 policies as so-called "take-out" private companies took on those customers. But that has come to a screeching halt in 2009. Overall, only about 90,000 policies have been absorbed by private companies so far this year.

The latest figures show that Citizens had roughly 1.05 million policyholders in September, compared to 1.08 million policyholders at the start of the year. That means even as Citizens has lost some customers, it has gained others.

For some, this is just a reflection of the reality that the Florida market remains volatile even though no storms have hit the state for four years. The predecessor to Citizens had as many as 1.4 million policies in the years following Hurricane Andrew, but the carrier was able to slim down to about half a million policyholders by the end of 2001.

That situation is starkly different now that many major carriers have pulled out or sharply curtailed their exposure.

"Citizens started out as the residual market and today Citizens is the market," said Allan Katz, a Tallahassee attorney and member of the Citizens board of governors. "We have to recognize that the largest writers of homeowners' insurance in Florida have decided to leave the market."

Smaller Citizens, Less Exposure

There is good reason to have Citizens as small as possible. Anytime the state-created insurer can reduce its exposure, there is less need to impose assessments on insurance policies if a large storm wipes out its claim-paying capacity. It also cuts down on the likelihood that Citizens would seek reimbursement from the Florida Hurricane Catastrophe Fund, which is the primary source of reinsurance for the company.

But Citizens remains overexposed, and that is a key reason why lawmakers agreed to lift a three-year-old rate freeze at the start of 2010. Citizens will be allowed to raise rates as high as 10 percent for individual policyholders, although some may see smaller increases.

There are plenty of theories as to why the size of Citizens has remained relatively stable this year. Katz said he just does not believe there is enough private capital out there to convince anyone to absorb the policies. "I don't know if there is enough capacity to take anything out of Citizens that is meaningful," said Katz.

Locke Burt, president of Security First Insurance in Ormond Beach, said that he does not have any interest in taking on any Citizens' policies because they just are not attractive to him. He said the bulk of remaining policies either provide sinkhole coverage or property coverage in the expensive South Florida market.

"You cannot write business and make money at Citizens' rates in South Florida," said Burt, who served on a special task force created by the Legislature to review Citizens' operations. "The requirement of offering full sinkhole coverage makes writing in sinkhole areas unattractive. The remaining risks in Citizens are old, undervalued, and mobile homes. These are risks that cannot be profitably written at standard rates on standard forms."

State Farm Decision

Another major element that could impact the size of Citizens in the coming year is the ongoing battle between State Farm Florida and state regulators. The state's largest private property insurance carrier announced in January its plan to pull out completely from the Florida market by the end of 2011. But the company, which says it is losing money in the state, has not been able to non-renew any of its policies because regulators have objected to the withdrawal plans.

One of the biggest sticking points is whether customers now enrolled in State Farm could switch over to Citizens. State regulators are dead set against that, and say that State Farm needs to let its own agents begin writing for other private carriers instead of having agents just place their customers in the state-created insurer.

In court filings, State Farm contends that state regulators have no legal authority to issue such a mandate. They further argue that their customers can switch to any company now. Regulators and State Farm are scheduled to argue over the withdrawal plan in an administrative court in November. Until that case is resolved, both State Farm and Citizens remain in limbo.

"We can't do much as an organization until we have some realistic and solidified time frame if we need to ramp up," said Christine Turner, Citizens' director of government relations, during a recent meeting with Citizens' officials.

Meanwhile, Office of Insurance Regulation (OIR) officials say that the State Farm decision may be a reason that other private carriers have been reluctant to assume Citizens' policies this year. It is up to state regulators — not Citizens itself — to decide which policies can be assumed. Security First, for example, offered to take 50,000 State Farm policies.

Tom Zutell, a spokesman for OIR, said that the approval policy for a take-out company requires the company to go through "rigorous" financial and solvency tests. That would not necessarily be the case for a company that wants to assume State Farm policies. "There would be hardly any of that level of scrutiny involved," said Zutell.

Impact on Citizens

Citizens' board member Katz disagrees with the OIR position to block State Farm from transferring its policies to Citizens. He said that some of the policies that would get added could help the company spread its risk throughout the state. "If you really want to make Citizens economically a little better, that's one way to do it," said Katz.

While some may disagree with his assessment, Katz concludes that policymakers need to realize that Citizens will remain a fixture in the property insurance market in Florida and that it is now a vital part of the state's overall economy.

"Given the amount of exposure Citizens has, there is no way that Citizens will ever be viable as an insurance company in a traditional sense," said Katz. However, he noted that also makes it even more important that Citizens remain as financially healthy as possible, because homeowners and banks will need to rely on it for insurance. "Citizens cannot fail financially because the state cannot afford to fail financially," said Katz.