The Florida Hurricane Catastrophe Fund, the state-run reinsurance facility from which all property insurers in the state are required to purchase coverage, would not be able to borrow enough money in the capital markets following a major hurricane to cover its $18.389 billion in potential claims-paying obligations, according to new analysis from the fund’s financial advisor.
The Oct. 18 report from John Forney of Raymond James Financial estimates the fund has $15.170 billion of claims-paying capacity for 2011, which Forney derived from Paragon Strategic Solutions Inc.’s projection that the fund will have a $7.170 billion year-end cash balance, and estimates that the fund has the capacity to raise up to $8 billion in post-event bonds in the 12 months following a major hurricane. The bonding capacity projection was $3 billion less than the $11 billion estimate offered prior to the start of this year’s hurricane season.
Those estimates, which do not include $6 billion in potential additional bonding capacity the fund could raise in the second year following a storm, would leave the fund with a 12-month funding shortfall of $3.219 billion. The fund’s statutory obligation for mandatory coverage for June 1, 2011 through May 31, 2012 is $17 billion, while an additional $1.389 billion in reimbursement obligations stem from two optional coverages that insurers may select.
Forney notes in the report that “estimating the FHCF’s post‐event bonding capacity is an inexact science,” adding that “the largest single issue in the municipal market (taxable or tax‐exempt) since 2009 was $6.543 billion by the State of California.”
Indeed, the $8 billion estimate might be optimistic, as it represents merely the midpoint of a range of estimates provided by investment banks who would be charged with bringing the bonds to market. The report notes that J.P. Morgan estimated the FHCF’s 12-month bonding capacity at $6-$8 billion, and Goldman Sachs’ estimate was just $5 billion. Using the latter estimate, the cat fund’s shortfall could be as large as $6 billion.
To pay off its debts, the fund would lay assessments on nearly every insurance policy sold in the state. Indeed, Florida’s drivers are still paying off assessments on their auto insurance policies for claims the cat fund paid stemming from Hurricane Wilma in 2005. How the fund would pay claims should its obligations exceed what it can borrow is less clear. Florida has no state income tax.
None of this should be surprising. It was the inevitable result of former Gov. Charlie Crist’s misguided plan to curry short-term political favor by rolling back property insurance rates and subsidizing the Florida market with unsustainable state-backed programs, including both the FHCF and the massive Citizens Property Insurance Corp.
The Associated Press quoted the fund’s chief operating officer, Jack Nicholson, as noting that the reinsurance is priced so that primary insurance rates would be roughly 25% cheaper than would be the case relying solely on the private market. However, Nicholson also told legislators last month that the fund was on “shaky ground.”
“I think we are dangerously overexposed considering the current reality of the marketplace,” he said. “It scares me to death where we are.”
Nicholson wants state lawmakers to scale back the size of the fund. That would likely cause insurance premiums to rise. It has the backing of many key Republicans, including Gov. Rick Scott.
Separately, Nicholson acknowledged how the state of the national economy, and particularly the state of the municipal bond market, has forced the fund’s management to face some uncomfortable realities:
“We used to think we could bond for $55 billion in multiple hurricane seasons,” Nicholson said. “That’s fairy land now.”
