Wall Street Journal: Florida Worry Season Starts
Jun 3, 2012
The following article was published in the Wall Street Journal on June 3, 2012:
Florida Worry Season Starts
By Leslie Scism
Thanks to six straight years without a hurricane and a welcoming market for so-called catastrophe bonds, Florida’s state-run insurance program started the storm season in better shape than in past seasons to pay damage claims.
But some Florida officials are concerned that even one highly destructive storm could batter the unusual program and the state’s struggling economy, despite forecasts of a gentler-than-normal hurricane season.
Florida has more vulnerable beachfront than any other U.S. state.
Under Florida’s program, two big, state-run insurance entities might need to sell billions of dollars of bonds after a storm. Such bonds would be paid off through assessments on property-casualty policyholders of all insurers in Florida and many other types of insurance. Businesses would also bear a burden.
But critics say Florida shouldn’t count on massive bond sales when future market conditions are unknowable.
“It would take a pretty bad storm to trigger all that, but we could have a real mess on our hands,” said Sam Miller, executive vice president of the Florida Insurance Council trade group. Some insurers might collapse if the bond sales went badly.
Colorado State University experts are predicting 13 tropical storms, five hurricanes and two major storms with winds of at least 111 miles per hour during the season that began Friday. A hurricane has winds of at least 74 mph.
That was one of the biggest such deals in U.S. history and the first by Florida, said Sharon Binnun, chief financial officer of Citizens Property Insurance Corp.
The state program insures about 1.5 million homes and businesses, or about one-fourth of the market, with $505 billion in risk exposure.
Bond investors could be wiped out if a major hurricane hits.
According to risk modelers cited by Standard & Poor’s, Andrew and an unnamed 1926 storm would have caused the loss of all principal.
Paul Schultz, chief executive of Aon Benfield Securities, said demand for catastrophe bonds has been strong this year as pension funds seek investments with performance that isn’t tied to other markets.
Citizens, which has a surplus of about $6 billion, also recently purchased $750 million of private-sector reinsurance.
Earlier this year, Citizens was adding thousands of new policyholders every week. The torrid growth has eased as executives try to make its policies less attractive.
Officials are increasing rates by the maximum amount allowed by law and have capped coastal homeowner coverage at $1 million, among other moves.
If a major storm strikes, most of the bond sales would be the responsibility of the Florida Hurricane Catastrophe Fund. The entity provides a type of low-cost reinsurance to Citizens and more than 165 other insurers in Florida.
This hurricane season, the fund could be responsible for as much as $17.3 billion in payments.
In the event of a major hurricane, the fund might need to sell up to $8.76 billion of bonds to supplement its reserves. Yet its 12-month capacity for such sales is about $7 billion, based on the average of four estimates from Wall Street firms obtained in May by Raymond James Financial Inc., the fund’s financial adviser.
Earlier this year, Florida Hurricane Catastrophe Fund Chief Operating Officer Jack Nicholson unsuccessfully pushed for legislation that would have shrunk the entity, given the unpredictability of credit markets.
He is concerned about a repeat of the frozen financial markets of 2008.
“What would have been the financial impact on insurers and the state’s economy?” he said. “This is what keeps me up at night.”