FHCF Advisory Council Meeting Report: June 9

On Monday, June 9, 2008, the Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) met to discuss post-event revenue bonds and pre-event financial products.

Council Chairman Bill Huffcut called the meeting to order with a quorum of members in attendance. Also in attendance were Jack Nicholson, Senior FHCF Officer, and financial advisor John Forney from Raymond James & Associates.

Mr. Nicholson gave the Senior FHCF Officer’s Report, which included the following:

• An Update on the Financial Services Team
• Post-Event Revenue Bonds from the 2004 and 2005 Hurricane Seasons
• Pre-Event Financial Products

Financial Services Team Update

The Financial Services Team has been evaluating reinsurance and other financial product options for pre and post-event debt financing.

Post-Event Revenue Bonds from the 2004 and 2005 Hurricane Seasons

On March 31, 2006, reported incurred losses totaled $3.419 billion. This total increased to $4.836 billion on April 28, 2008. Involvement by public adjusters in reopening old, and submitting new, claims was a significant reason for this increase. Most of the losses reported are from the 2005 hurricane Wilma claims.

The FHCF currently has a $738 million shortfall due to this loss increase. On June 10, 2008, the FHCF will seek approval from the trustees of the State Board of Administration (“SBA”) to issue an additional $625 million in bonds. It was noted that the FHCF should be able to issue the bonds prior to July 4, 2008. The staff did not recommend seeking $738 million in bonding authority because the FHCF would likely need to increase its current assessment rate, which is 1 percent.

Council members discussed the adequacy of the one percent assessment. Mr. Nicholson stated that a one percent fee was proper given the information available at that time. He also noted that changing the assessment fee would be more of a public policy question, but that the FHCF accepts one percent as adequate.

The Council approved seeking authority to issue up to $625 million in additional bonds from the SBA trustees, who will then authorize the FHCF Finance Corporation to issue the bonds through a resolution.

Pre-Event Financial Products

Next, Mr. Forney reviewed pre-event financial products the FHCF is considering. The need for pre-event financial products stems from an increase in the size of the FHCF to approximately $25 billion. Mr. Forney noted that some concerns about the financial strength of the FHCF are misguided. The FHCF currently has $8 billion available to pay claims without any bonding and could comfortably bond an additional $10 billion.

Mr. Forney stated that capacity and ability to execute are two primary factors in selecting a financial product for pre-event financing.

The two products thoroughly discussed include liquidity products (i.e.: put options) and risk transfer products (i.e.: reinsurance). Mr. Forney noted both types of products have potential benefits and risks. Risk transfer options have a higher front-end expense and are not an ideal product for the FHCF. Liquidity options, historically used by FHCF, are also not ideal because financial market liquidity is at a historically low capacity.

Through a “put option,” a financial institution would promise to purchase potential bonds at a price set at the time of the option contract. The rough estimated cost of this product on $5 billion is approximately 4.5 percent ($225,000,000). A risk transfer option such as private reinsurance on $5 billion is approximately $1.5 billion. Mr. Forney noted that $5 billion is the approximate current maximum capacity for a put option financial product.

Although they did not take any formal action at this time, the Council discussed and agreed that a “put option” product may be the most viable option, but not by a clear and convincing margin.

Following this discussion, reinsurance company representatives provided brief comments. They noted that capacity was not removed from the current market in their proposals to the FHCF. Also, they stated that reducing the Temporary Increase in Coverage Layer (“TICL”) and allowing the private market to issue that level of reinsurance is a cheaper reinsurance option because issuing reinsurance to individual companies is less costly than issuing reinsurance to the FHCF, which is comprised of all participating companies as a single unit.

Mr. Nicholson noted that this was an important point and one often misunderstood. It was also noted that most companies purchase the TICL coverage from the FHCF because they are statutorily mandated to buy reinsurance at the TICL layer price.

The meeting adjourned following this discussion. It was noted that the next meeting is expected to take place in mid-October.

Should you have any questions regarding the above information, please feel free to contact Colodny Fass.

 

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