Florida Cabinet Meeting Report: April 14

The Florida Cabinet met on Tuesday, April 14, 2009, during which Florida State Board of Administration (“SBA”) Executive Director Ash Williams presented items relating to the Florida Hurricane Catastrophe Fund (“FHCF”).  To view the complete meeting agenda, click here.

Below is a brief overview of pertinent insurance-related matters that occurred at the meeting:

The SBA agenda was approved without objection, with the exception of Item 4, which was an authorization request for the Florida Hurricane Catastrophe Fund (“FHCF”) to purchase financial product(s) to enhance its ability to respond to participating insurers’ losses for the 2009/2010 reimbursement contract year

Mr. Williams requested that Item 4 be changed to a discussion item, rather than one requiring a vote or other action.  He explained the reason for the change to be that the FHCF is not currently seeking to purchase a financial product at this time.  It has been determined that such a purchase is not in the FHCF’s best interest, given the consideration that any risk transfer achieved through such a purchase would be relatively low, while the cost of such a product would be quite high. 

Mr. Williams further explained that, following the March 10, 2009 SBA meeting, the original plan was to have a Raymond James Investments representative discuss various financial product purchase options.  However, after examining reinsurance, finite reinsurance, and put-options, such an action no longer seems prudent. 

In providing further reasons why purchasing a financial product would not be prudent at this time, Mr. Williams explained that, even though the FHCF coverage gap is currently approximately $18 billion, during the past six weeks, its access to financial markets has improved from approximately $3 billion to $8 billion due to improvements in those markets. 

He further stated that, “as of right now, the FHCF could cover losses between $12-15 billion, in other words, we could cover the loss expectation of a Hurricane Andrew-sized storm.” 

Mr. Williams added that the probability of FHCF resources being outstripped by losses has recently been reduced from approximately six percent to three percent, and that this number could continue to decrease. 

Mr. Williams informed the Cabinet that the FHCF is proceeding at both the state and federal levels to assure that it is appropriately capitalized and solvent.  Florida Attorney General Bill McCollum asked Mr. Williams to clarify his earlier statement that the FHCF will not be purchasing a financial product because the expense is too high and the probability of needing it is too low.  Mr. Williams explained that, at this time, buying a financial product is essentially a “waste of capital” that should be saved and invested instead.

Florida Chief Financial Officer Alex Sink asked Mr. Williams about the possibility of raising more capital by bond issuance, to which he responded that the main objective of pre-event bonding is to issue at the lowest possible cost, and then invest the proceeds in order to cover losses.  He cautioned, however, that only approximately $1 billion in capital could be raised in this “expensive” manner. 

Mr. Williams projected optimism about trying to obtain tax-free status for this type of income, which could then provide additional capital. 

 

FHCF 2009/2010 Premium Formula and Proposed 2009/2010 Rates

In presenting SBA Action Item 5, which pertained to requests for approval of the 2009/2010 FHCF Premium Formula and proposed FHCF 2009/2010 rates, Mr. Williams explained that the FHCF was not recommending a change in last year’s rates beyond a 0.84 percent increase.  He explained that the small increase is being driven by a decline in interest income, which has fallen from more than four percent last year, to less than one percent this year. 

Mr. Williams reiterated the FHCF’s investment policy guidelines, which are prioritized as (1) safety, (2) liquidity, and (3) return on investment.  He stated that the FHCF has been able to save money in lower monitoring and pre-event costs, and that the small increase in the rates will have very little impact on consumers.

After presenting the remaining SBA action items, Mr. Williams provided the Cabinet with an update of his visits together with Florida Insurance Commissioner Kevin McCarty at both the state and federal levels for the purpose of solving the FHCF’s financial problems.  Mr. Williams related that he and Commissioner McCarty will visit Washington D.C. during the week of April 20, and are working with delegations from Texas, California and Louisiana in order to persuade the federal government to give these states access to a “Federal Credit Guarantee” (essentially, a line of credit).

Mr. Williams seemed to be optimistic about the chances for this type of federal support, because, as he explained, “Florida is a good credit risk (rated “AA”) and the State is not asking for money–just credit–which would only be called upon in the event of real need.” 

At the state level, Mr. Williams explained that legislation is pending in both the Florida House and Senate that would lower the Temporary Increase In Coverage Limits  (“TICL”) layer of the FHCF over a five-year period, and which also would accelerate FHCF capital build-up over a two-year period by two percent above the actuarial rate.  Mr. Williams explained that this legislation is providing a “glide-path” that would achieve two desirable goals: (1) scale back the TICL layer; and (2) capitalize the FHCF. 

CFO Sink raised the point that Florida domestic insurers are facing the risk of having their ratings downgraded because of the gap in the FHCF’s capitalization.  Commissioner McCarty responded to CFO Sink’s point by stating that, regardless of a storm, Florida domestic insurers are facing a downgrade.  Although there are mechanisms available to many of these companies for risk transfer, added Commissioner McCarty, many of these companies will be unable to do so, which presents an ongoing concern.  CFO Sink replied by stating that Commissioner McCarty and Mr. Williams “need to be as creative as possible” in developing a solution to this problem, inasmuch as this affects larger segments of the already-troubled economy.

In some relation to CFO Sink’s point, Attorney General McCollum sought clarification from Commissioner McCarty regarding to his understanding of the global reinsurance market, and asked whether Florida’s reinsurance market was too small to handle all of the demand. 

Commissioner McCarty explained that, essentially, Attorney General McCollum is correct, because, although the reinsurance market is quite large, it is only able to allocate a certain amount of risk and capital to Florida. 

Commissioner McCarty added that one way to help Florida’s insurance industry deal with that reality is to increase global reinsurance market transparency.  In response to this, CFO Sink asked Commissioner McCarty about the Florida Office of Insurance Regulation’s (“OIR”) efforts with the Bermuda Authority and in the United Kingdom with respect to achieving transparency.  Commissioner McCarty stated that, although the OIR has been focused on achieving transparency with the U.K. market, similar efforts with the Bermuda Authority should be complete in about 30 days.

 

Robert H. Gidel Appointed to the SBA Investment Advisory Council

When SBA Action Item 2 was presented, which pertained to the request for approval of the appointment of Robert H. Gidel to the Investment Advisory Council, both Attorney General McCollum and Mr. Gidel, himself, made mention of Mr. Gildel’s considerable experience in managing private equity investments and university endowments.  Both stated that Mr. Gidel is very capable of serving in this function.

Before concluding the SBA’s report, Mr. Williams reported that the Florida Pension Fund, has added $12 billion to its reserves since the financial markets’ low point of March 10, 2009. 

To the SBA’s April 14 Cabinet agenda, click here.

 

 

Should you have any questions or comments, please contact Colodny Fass.

 

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