One of Florida's state-run property insurers will explore using a combination of bonds and private reinsurance to cut costs and support financing needs for this year's and future hurricane seasons.
The Florida Hurricane Catastrophe Fund says it needs about $2.2 billion to shore up its liquidity needs and will examine using taxable municipal bonds or — for the first time ever — transferring a portion of its risk via reinsurance from the private sector, or use a combination of both.
The strategy is designed to take advantage of historically low interest rates as well as historically low risk-transfer costs, according to Jack Nicholson, chief operating officer of the FHCF.
In past years, the Cat Fund relied primarily on the proceeds of taxable munis to fill a liquidity gap between cash-on-hand and the amount that may be needed to make timely payments should it need to make payouts following a hurricane strike.
Since 2007, the fund has issued $5.5 billion of short-term notes for this purpose. So far, the proceeds have been reinvested and not used to pay claims.
With its coffers bolstered by nine hurricane-free years, the FHCF is in its strongest-ever position with $12.5 billion on hand in cash, and $2 billion from notes issued in 2013, officials said.
The fund, which is overseen by the State Board of Administration, promises up to $17 billion in total payouts to insurers, which leaves a full funding gap of about $2.2 billion for the upcoming June 1 hurricane season.
With low costs for bonding and reinsurance, the Cat Fund can potentially obtain "extraordinary value" from both markets to protect Floridians, SBA Executive Director Ash Williams said Tuesday.
"Never have the stars lined up this way," Williams told Gov. Rick Scott, Chief Financial Officer Jeff Atwater, and Attorney General Pam Bondi, who serve as the SBA's board of trustees.
Williams said the time is right to explore reinsurance from the private market because global reinsurers have more capacity than ever, and that drives their hunger for new business, particularly from entities like the double-A rated Cat Fund.
He added, however, that the cost of pursuing reinsurance will not be known until a broker is hired.
The board voted to allow Cat Fund officials to hire a broker to explore the cost of reinsurance, and to report back at its April 14 meeting.
That report is expected to include recommendations for issuing bonds, using reinsurance, or a combination of both to fulfill the funding gap.
The Cat Fund has had the ability to use reinsurance to cover promised payments since its creation 1993, a year after Hurricane Andrew devastated south Florida and the state's private insurance market, driving companies out of business altogether or out of the state.
Several factors have kept the fund from using reinsurance, including the fact that as a tax exempt state-run agency it can issue municipal bonds to pay claims.
That bond debt, however, is paid back with assessments on property insurance policies across the state — including auto policies — and has raised political concern about the reliance on debt financing.
Until recent years, the price of reinsurance — which allows risk to be offloaded to another company — has been volatile and costly. Today, officials say, the price has come down significantly largely because of an influx of investors in the insurance sector.
The Cat Fund's possible use of reinsurance has become controversial among some legislators who claim it could raise costs for residents.
Last year, when legislators examined the Cat Fund's potential use of reinsurance, a state official estimated that it could raise retail rates by ½% to 1%.
In testimony before the Florida House Insurance & Banking Subcommittee in January, Nicholas said that he did not believe that retail rates would be adversely impacted if the Cat Fund used reinsurance to manage a portion its own risk.
"Wouldn't it be wise to shift more to the private sector?" asked Rep. David Santiago, R-Deltona, who is a financial manager with JPMorgan Chase.
"I'll fight for that," Nicholas responded.
He also cautioned that there are many "interested parties" in the issue, including opponents who had written committee members against the Cat Fund's use of reinsurance.
In a letter to Florida newspapers on Monday, state Rep. Frank Artiles, R-Miami, said the fund's proposal today is a rehash of what was considered, and struck down last year.
"The proposed transfer of billions in risk from the Florida Hurricane Catastrophe Fund to the private offshore global reinsurance market is nothing more than corporate welfare and would mean higher property insurance rates for Floridians," wrote Artiles, who lists his occupation on the Florida Legislature's website as a public adjuster, appraiser, and general contractor.
In an interview with The Bond Buyer Tuesday, Nicholson said that in addition to better pricing and lower costs now, another benefit to using reinsurance is that it could stave off the need to issue bonds and preserve that capacity should the state be hit with back-to-back hurricanes.
While many reinsurance companies are not based in the U.S., they must be approved by the state Office of Insurance Regulation in order to do business in Florida, he said.
The state created the FHCF after Hurricane Andrew's devastation in 1992 to stabilize Florida's insurance market and economy.
It is tax exempt by virtue of a private-letter ruling from the Internal Revenue Service.
It provides coverage for hurricane loss reimbursement to private property insurers and the state-operated insurer of last resort, Citizens Property Insurance Corp., which is also a tax-exempt entity.
The coverage private companies obtain from the Cat Fund could cost twice in the private market, Nicholson told the House Insurance & Banking Subcommittee in January.
"We operate similar to a reinsurer, but the Cat Fund is unique because it is tax-exempt," he said. "Think of it as a major risk management program that addresses hurricane risk management peril."