FHCF Advisory Council Meeting Report: May 12
May 12, 2009
On Tuesday, May 12, 2009, the Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) met in Tallahassee, Florida. The Council considered, discussed and approved three agenda items: the May 2009 FHCF bonding estimates, filing the FHCF premium formula Rule, and filing the FHCF Reimbursement Contract Emergency Rule. Meeting materials, including copies of the proposed Rules, are attached for your review. To view the meeting agenda, click here.
Below is a summary of the meeting discussions and actions:
John Forney of Raymond James and Associates reviewed the May 2009 FHCF bonding estimates. During the time period since the most recent Council meeting was held (October 14, 2008), financial and insurance markets were severely troubled, but since have dramatically improved. Credit markets are no longer frozen, interest rates are lower and bonding capacity is improved.
Recent Florida property insurance legislation was passed in the form of House Bill 1495, which will be helpful for capacity because the size of the FHCF Temporary Increase in Coverage Limits (“TICL”) layer would be reduced if the bill becomes law.
At the federal level, U.S. Senator Bill Nelson has filed S. 886, which would provide a federal guarantee on debt issued by the FHCF. According to Mr. Forney, these are good developments for the FHCF.
However, there is still significant uncertainty on whether the FHCF could bond to meet its necessary obligations if a catastrophic event occurred. Liquidity is the primary concern of the current financial markets.
Meanwhile, public perception of the FHCF has caused issues. Mr. Forney defended the FHCF, noting its strong ability to repay debt and the small likelihood of its needing to access financial markets in order to cover the full amount of its exposure.
Mr. Forney reviewed the FHCF’s estimated loss capacity based on input from the FHCF’s senior managing underwriters. The FHCF’s “theoretical capacity” is $45.96 billion. However, its “estimated capacity” for post-event bonding is believed to range from $4.5 to $10 billion, which presents a large degree of uncertainty.
Pre-event and other FHCF liquidity resources total $3.5 billion, which include floating rate notes maturing on October 15, 2012. The FHCF’s long-term bond rating is very good (Aa3/AA-/AA-).
Responding to questions by Council members, Mr. Forney noted that any debt issued that is backed by the federal government would not be tax-exempt. However, that would not affect the tax-exempt status of the FHCF, itself.
The Council members engaged in significant discussions regarding public perception of the FHCF, its ratings, bond markets, and capacity measurements and estimates.
Mr. Forney indicated that it is reasonable to expect the FHCF to be able to issue $8 billion in post-event bonding over 12 months. FHCF Chief Operating Officer Jack Nicholson reminded that it is difficult to design post-event financing products because of the uncertain state of the markets.
Concluding his presentation, Mr. Forney noted that the FHCF’s financial condition has improved dramatically since October 2008, but that uncertainty remains about the impact of a large event on its status. Currently, the FHCF has $7.83 billion in liquid resources.
The Council discussed publishing minimum, maximum and a point estimate for post-event bonding capacity. After further discussion, the Council voted on a point estimate of $8 billion. It was noted that this estimate would not impact the FHCF premium formula.
The Council also voted to approve filing the Premium Formula Rule (Rule 19-8.028) and, in the anticipation that HB 1495 will become law, to approve filing Emergency Rule 19-ER09-1 relating to the FHCF Reimbursement Contract.
The Emergency Rule includes $2 billion in TICL reduction and $10 million optional coverage for limited apportionment companies, participants in the Insurance Capital Build-up Incentive Program, and select others. A public workshop and hearing will be scheduled for these Rules prior to their presentation for final adoption by the Florida Financial Services Commission.
FHCF Legislative Update
During the Council meeting, FHCF staff provided a review of passed 2009 bills that will impact the FHCF if they become law.
HB 1495
HB 1495 impacts the FHCF by:
- Changing the FHCF Contract Year from January 1 through December 31 starting in 2011. In 2010, the Contract Year is June 1 through December 31;
- Reinstating the $10 million coverage option through 2011;
- Implementing a “cash build-up” factor;
- Reducing TICL by $2 billion annually until it is phased out in 2013; and
- Increasing the TICL premium.
HB 1171 and HB 1758
FHCF staff reported on HB 1171 (relating to deregulated residential property insurance policies) and HB 1758, which would provide for the biannual (rather than annual) adoption of models by the Florida Commission on Hurricane Loss Projection Methodology.
Staff also provided a report on 2004/2005 FHCF losses, along with an update on the progress of Senator Nelson’s federal legislation that was previously discussed.
Following completion of the agenda, the meeting concluded.
Should you have any questions or comments, please do not hesitate to contact Colodny Fass.
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