Florida’s state-run reinsurance facility still faces a potential $1.5 billion gap to fulfill its maximum mandatory obligation, although it appears poised to be in better financial condition for the 2013 hurricane season than previously thought.
With just six weeks left in the hurricane season, the financial outlook for the Florida Hurricane Catastrophe Fund has improved but there is still concern whether it will meet its statutory obligation to have enough funds for two hurricane seasons.
By state law, the reinsurance facility that all property insurers in the state participate in must have $17 million in funds for a single hurricane season and $11 billion for a second season. However, due to the dramatic downturn in the worldwide bond markets following tsunami in Japan and California earthquakes, there have been questions of whether the facility could raise those kinds of funds.
Following those events, the Cat Fund’s financial advisors in their October 2011 estimates of the hurricane fund said it would only have $7 billion in cash and at best could issue $7 billion in bonds, leaving it $3.2 billion short of the $17 billion that it is required to reimburse insurers’ losses in a single storm season. Another $11 billion in bonds would be needed for a second hurricane season. Adding the $11 million second season requirements to the first season $3.2 billion gap in coverage, the fund would need to issue $14.2 billion in bonds, making it one of the highest bond deals on record.
To put that in perspective, the largest municipal bond deal executed since 2009 was a California $6.5 billion bond issuance.
Now, however, given the high probability the fund will not be accessed due to hurricane losses this year and a stabilization in the bond market, the fund’s financial outlook is much improved.
Kapil Bhatia, with Raymond James and a Cat Fund financial advisor, said that at year’s end the fund will have an estimated $8.5 billion in cash and based on the bonding estimates of Goldman Saks, JP Morgan, Barclays, and Citi, the fund should be able to bond roughly $7 billion.
And even though there is still a $1.5 billion gap in funding, the Cat Fund should be able to make that up by issuing additional bonds 12 to 24 months after it exhausts all of its other financial resources.
Bhatia cautioned, however, that these estimates are just a snapshot where the market is today and the future could be different.
“There is no certainty where we will be six months or a year down the road,” said Bhatia. “The only certainty is to get cash in the fund.”
Cat Fund Executive Director Jack Nicholson said that while the outlook is much improved from prior years, he would like to see the legislature take steps to “right side” the fund.
He said that right now the bond markets are stable, but that could change. He said the only certainty that can be obtained is setting the Cat Fund’s capacity at a manageable level so that it would have the capacity to provide reinsurance for both a single season and beyond.
“My job is to manage risk not to create risk,” Nicholson said. “And we can either be lucky or smart, but sometimes you have to be smart.”
The alternative, he said, is that if the Cat Fund exhausts its resources after a single hurricane season and can provide no other coverage during a second storm season, insurers would be left to scramble for private reinsurance at prices that could result in them withdrawing from the market.
“We need to be more than a one day wonder,” Nicholson said of the Cat Fund. “Otherwise, reinsurance will double the next time.”
Nicholson has proposed reducing the Cat Fund’s single season obligation, increasing the industry retention that is currently at $7.38 billion and ending the temporary increase in coverage limits.
One piece of good news is that if the Cat Fund has to enter the bond markets it should not be competing with Citizens Property Insurance Corp. Citizens is projecting that it will have roughly $6 billion in surplus as of the end of the year along with another $6.6 billion in reinsurance and catastrophe bonds.
“Citizens has sufficient resources for up to a one-and-sixty year hurricane,” said Bhatia. “They would not be in the market until after the Cat Fund.”