A Florida Insurance Council White Paper

This was published as an opinion piece in the Florida Underwriter. It is written by FIC Executive Vice President Sam Miller

July 3, 2008

Floridians will face significant insurance surcharges some day to help generate funds needed by the Florida Hurricane Catastrophe Fund, Citizens Property Insurance Corporation and private insurers. An even worse scenario is possible. A category 4 or 5 hurricane in Tampa Bay or Southeast Florida probably would mean Cat Fund payouts of $28 billion, billions
more than the program can timely raise. Some claims might go unpaid while Florida government scrambled to find the money.
 
We have some real issues to address in the system to finance losses from the all too frequent hurricanes striking Florida and there was little appetite in the Legislature this year to tackle them.

The monster storm behind the doom and gloom scenario with the Cat Fund running out of money could strike this year, but probably won’t. One or more moderate hurricanes striking the state is likely - how much longer can our good luck last – and  hopefully the system will be okay absent the monster hurricane. Cat Fund and Citizens Property officials have done probably all they could to be ready to respond.

Cat Fund officials were cautiously optimistic during the annual Participating Insurers Conference in June they can handle anything but a 1-in-100-year hurricane. This would include a repeat of the 2004 and 2005 hurricane seasons and implementation  of the initial “mandatory” Cat Fund program of over $16 billion.

Jack Nicholson, FHCF senior officer, and John Forney, Raymond James & Associates, financial advisor for the Cat Fund and Citizens Property Insurance Corporation, participated in a panel during the conference. Their conclusion was, the news is mixed. From a liquidity standpoint, the Cat Fund is in the best shape in its 15-year history, with $8.1 billion in cash. This consists of $3.6 billion in cash surplus from premiums and $4.5 billion in pre-event bonding already implemented. This would be on top of the $6.878 billion industry retention for the 2008 hurricane season and a10 percent co-pay once the Cat Fund  triggered.

In addition, the Cat Fund’s underwriters are guardedly confident they could issue $10 billion in bonds for anything less than a single monster hurricane because the financing could be spread out for as much as four years. They note that it took 50 weeks for the Cat Fund to pay its first $3 billion in the 2004 hurricane season.

Anything we have faced so far we could handle again with much greater ease,” Nicholson said during the panel.

The bad news is the major difficulty the Cat Fund would have in timely producing the tens of billions of bonds necessary in a 100-year storm event that would require its $28 billion in total capacity. With the economic markets in the state they are in now, that is just not in the cards.

The State Board of Administration, on July 2, did execute an extraordinary agreement with Warren Buffett-owned Berkshire Hathaway, a $4 billion bond “put.” The state will pay Berkshire Hathaway $224 million for a guarantee it will purchase $4 billion in bonds if Cat Fund payouts in one or more hurricanes this year exceed $16 billion and activate the $12 billion
TICL. That is a total Cat Fund of over $20 billion and a lot of money, but still $8 billion short if the nightmare takes place.

The “97 percent probability” events can be handled, Nicholson and Forney said. The 3 percent probability event” triggers a  crisis. That would be a ground up residential loss of $25 billion or more, something the Cat Fund has never faced, and a 100-year event statistically – something not likely this year, but possible.

Citizens Property insurance Corporation, Florida’s largest property and casualty insurer and, according to one source, the fourth largest in the country, has developed a $20 billion claims-paying program that would get it through a repeat of the 2004 and 2005 hurricane seasons. A significant amount of this money comes from the Cat Fund, but the Cat Fund appears ready
to deliver at this level, as noted above.

Citizens announced at its June board meeting it had secured pre-event financing of $1.75 billion for its Coastal High Risk  Account.  This amount is in addition to the $1.6 billion bank credit line obtained for the Personal Lines Account and the Commercial Lines Account.  Citizens sold $1.75 billion of one- and three-year securities at yields ranging from 2.5 percent  to 4.37 percent. 

The financing provides Citizens access to cash it may need to pay future claims in its high-risk account. 

“With this issuance along with the other financially prudent decisions, Citizens will have more than $20 billon of claims-paying capacity,” reported John Forney, financial adviser for Citizens as well as the Cat Fund.

Citizens also recently completed the purchase of private reinsurance for the High Risk Account  for the mandatory co-payment  required to access payments from the Cat Fund. As Citizens noted in a statement, the purchase of reinsurance in the high-risk account transfers over $450 million of potential risk and assessments from Citizens’ customers and all Floridians to the
private insurance market.

So absent the cat 4 or cat 5 monster hitting Tampa or Miami, the system should deliver. But critical long-term challenges,  questions and issues remain, including the looming liability for major insurance surcharges, taxes, assessments or whatever you want to call them. The assessments will be borne by all Florida homeowners, anyone with an insurance policy on their car or truck and all business owners throughout the state. The bonds, the loans from the lines of credit, everything but cash  accumulated from premiums paid by Cat Fund and Citizens policyholders, must be paid back over a period of years, perhaps
decades.

The assessments have a cross-subsidization impact, with residents of inland Florida paying more for property insurance than  their risk justifies and coastal residents paying less than 100 percent actuarially-sound rates and enjoying the subsidy.

Other issues include what happens if and when the Cat Fund is on the hook for $28 billion; should the TICL program be extended or allowed to expire at the end of the 2009 hurricane season, as currently scheduled; should the Citizens rate freeze be lifted at the end of this year or be extended; and should Citizens continue to compete with the private insurance
community.

Lots of heavy lifting here and policy maker cannot ignore these tough questions forever.

We can be reasonably confident, at least, that the Cat Fund, Citizens Property Insurance and private carriers can pay their claims when hurricanes attack the state once more – which probably will be during the coming months.