Rick Scott said Citizens has $500 billion in risk exposure but less than $10 billion in cash

It’s become Gov. Rick Scott’s favorite talking point in the escalating debate over raising rates at Citizens Property Insurance: The state-run insurer has a whopping $500 billion in risk exposure, and a paltry $6 billion in surplus, or cash-on-hand.

In interviews, at Cabinet meetings and even in a pop-quiz-styled survey to the Florida Council of 100, Scott repeatedly uses these two numbers to illustrate the financial health of Citizens.

"I’m not sure how much smaller Citizens can get. But here’s the position Citizens is in now," Scott said during a May trip to the Florida Keys. "They have over $500 billion worth of risk, with less than $10 billion worth of surplus. So that’s a lot of risk, and I think one of the most important things homeowners want is if there ever is a disaster that their insurance company is going to be able to pay the bill."

In a survey given to the Florida Council of 100 last month, Scott got more specific, stating that the state-run insurer had $504.8 billion in total risk exposure and only $6.1 billion in cash surplus.

It’s a jarring numerical juxtaposition used to show that Citizens is severely undercapitalized and, if a major hurricane hits, would spur untold financial calamity for the state.

Fearing so-called "hurricane taxes," Scott asked the Citizens board of governors to find ways to drastically reduce the company’s size and exposure late last year. (Citizens currently has issued about 1.4 million policies.) The board came up with more than 30 proposals, most of which would lead to increased rates or reduced coverage for policyholders. To justify those painful rate hikes, proponents point to the weak financial position of Citizens, often comparing its cash on hand to its maximum exposure.

A growing chorus of critics say Scott and insurance industry insiders are using exaggerated, apocalyptic language to incite fear and justify large increases on insurance premiums.

The numbers are extreme, to say the least. After six years without a single hurricane hitting Florida, could Citizens’ finances really be that frightful?

We did a little digging and found that Scott’s statements about Citizens’ financial assets and liabilities, while technically true, omit major components of the financial structure of Citizens.

First, on the side of Citizens’ "surplus." The state-run insurer does, indeed, have nearly $6 billion in cash reserves, money it has been able to build up during the last six hurricane-free years. But that cash— the most Citizens has ever had--is only part of the pot the insurer uses to pay hurricane claims.

Few, if any, property insurers rely solely on cash surplus to pay claims in the wake of catastrophe. Citizens, like every other licensed property insurer in Florida, has backup insurance from the Florida Hurricane Catastrophe Fund. It also has private reinsurance worth hundreds of millions of dollars.

Finally, Citizens has the ability to sell bonds to pay the cover claims that exceed its surplus and reinsurance coverage.

Altogether, Citizens has about $19.5 billion in claims-paying ability, more than three times the amount cited by the governor. Most of that could be paid out before any assessments, or "hurricane taxes" would be required from non-Citizens policyholders.

The other half of Scott’s statement mentions that Citizens has $500 billion in total exposure to risk.

This is also true, but it has little to do with whether Citizens "is going to be able to pay the bill" after a storm.

What would it take for Florida to actually have to pay out $500 billion in claims? A superstorm 25 times as ferocious as Hurricane Andrew would have to hit South Florida, and zigzag its way through Florida’s peninsula, hitting all 67 counties and damaging or destroying every home and business with a Citizens policy. A series of back-to-back, Andrew-sized storms up and down the state could also do the trick.

In the absence of such an apocalyptic occurrence, a more realistic estimate of maximum losses would be the 1-in-100-year storm, the so-called "Big One," that would cause more damage than Hurricane Andrew in 1992.

Estimates indicate that kind of storm -- which only has a 1-percent chance of occurring in a given year -- would cost Citizens a maximum of $21 billion.

This number, while large and financially troublesome for Citizens, is nowhere near the $500 billion often repeated by the governor.

Scott spokesman Lane Wright said regardless of which numbers are presented, the fact that Citizens remains in a precarious financial position is central.

"No matter how you slice it, in the worst case storm, the one-in-100-year storm, Citizens still falls short of being able to pay its claims," Wright said, adding that Florida could also get hit with several back-to-back storms. "That’s a fact."

That’s true -- but those aren’t the words Scott has been using. He’s opted for the gasp-inducing $6-billion-versus-$500-billion language.

Our ruling

Scott has said repeatedly that Citizens has more than $500 billion worth of risk, but about $6 billion in cash surplus. But the $500-billion number vastly overstates what Citizens might have to pay in even the most vicious storm season imaginable. And the $6-billion figure undercounts Citizens’ ability to pay claims.

So those numbers are not the appropriate figures to use when determining whether the insurer "is going to be able to pay the bill" after a storm. More appropriate numbers would compare Citizens’ total claims-paying ability (about $19.5 billion) to the damage caused by a once-in-a-century kind of hurricane (about $21 billion).