Florida Hurricane Catastrophe Fund Advisory Council Approves October 2012 Estimated Claims Paying Capacity

 

At its meeting yesterday, October 9, 2012, the Florida Hurricane Catastrophe Fund (“FHCF”) Advisory Council (“Council”) unanimously approved the FHCF’s October 2012 estimated claims-paying capacity at $15.503 billion, approximately $1.5 billion short of the FHCF’s total potential maximum claims-paying obligation of $17.023 billion.

The meeting agenda and materials are attached.

Claims-paying capacity equals the sum of the FHCF’s projected fund balance, plus the estimated bonding capacity.  The projected year-end fund balance for the 2012-2013 Hurricane Season is estimated at $8.5 billion, with an estimated bonding capacity of $7 billion for 0 to 12 months.

If needed, the FHCF could use the estimated 12- to 24-month post-event bonding capacity of an additional $6 billion to meet its full initial season obligation, should a major storm strike.  The current average estimate of the 0 to 12-month bonding capacity-at $7 billion – is the same as it was in May 2012, which is the lowest it has been since May 2009.

Should there be a bonding shortfall, the FHCF could turn to the bank lending market or levy assessments up to $2 billion annually without issuing bonds, it was explained.

The Council approved the measure after Kapil Bhatia of Raymond James & Associates, Inc., outlined the accompanying figures.  Raymond James & Associates, Inc. is the FHCF’s financial advisor. 

Mr. Bhatia noted that the data he provided was not much different than that provided to the Council back in May 2012.  By law, estimates of claims-paying capacity are given bi-annually, once at the beginning of Hurricane Season and once at the end.  The 2012 Hurricane Season officially started June 1 and ends November 30.

During his presentation, Mr. Bhatia explained that there is some uncertainty with the estimates because they cannot predict how the markets will behave.

Total FHCF coverage for 2012 is $17 billion with Temporary Increase In Coverage Limits (“TICL”) of $23 million, Mr. Bhatia stated.  The total cash available is $8.5 billion, which leads to the potential bonding need of $8.5 billion-slightly less than the $8.7 billion May estimate, for a total of  $17.023 billion, he continued.

Mr. Bhatia said the markets are relatively stable, interest rates are low, and the six percent assessment rate is more than sufficient.  He added that the only way to minimize risk in case the markets proved to be volatile was to increase the FHCF’s pre-event cash resources.

One Council member questioned a disclaimer in the report stating that Raymond James was neither acting as the financial advisor nor municipal advisor and expressly disclaimed any fiduciary duties in connection with the subject matter of its presentation.  Another Council member noted that such disclaimers are routine.

Some discussion focused on the takeout efforts going on at Citizens Property Insurance Corporation (“Citizens”) and the way in which new companies are treated.  It was explained that, if a company starts up after June 1, as long as it writes a policy before December 1, it would have to provide a report to the FHCF.

It was noted that the Florida Cabinet approved Emergency Rule 19ER12-1 on October 9, 2012 for the FHCF, which will provide an optional date change for the FHCF 2012-2013 Contract Year in an effort to mitigate any unintended consequences for property insurance companies taking policies out of Citizens.

Another Council member said he supports moving Citizens and the FHCF to the private sector, but only if it is done properly and lowers the cost for consumers.  His assessment of the current takeout situation, however, was fairly negative.

He said Citizens is creating regional “monopolies” of small, marginally-capitalized specialty surplus lines insurance companies.  He called the situation “anti-competitive” and said it did not lower the cost for consumers.

He also said it has become too difficult to get mitigation credits, that the age and building standards of structures are not being recognized, and that the insurance base and risk pool is being “diminished” while low-risk policies are being “cherry-picked.”

Another speaker at the meeting corrected the statement that the Citizens’ takeout companies are surplus lines companies – it was noted that they are all admitted insurance companies.

Other discussion focused on “right-sizing” the FHCF, with several Council members offering thoughts on the subject.

In other business, the Council scheduled the next FHCF meeting for January 8, 2013.

With no other business before the Council, the meeting was adjourned.

 

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