BRADENTON, Fla. — State officials this week gave the Florida Hurricane Catastrophe Fund Finance Corp. the go-ahead to sell up to $710 million of tax-exempt revenue bonds for storm-related losses that occurred in 2005.
The state-run nonprofit reinsurer, known as the Cat Fund, expects to sell the bonds in May, before the June 1 start of the six-month-long hurricane season.
The sale will be the third tranche of bonds to pay claims related to the four hurricanes that battered the state in 2005. The fund, an insurer of reinsurance, sold $1.35 billion of revenue bonds in 2006 and $625 million of revenue bonds in 2008.
Cat Fund officials hope it will be the final tranche for claims related to Hurricanes Dennis, Katrina, Rita and Wilma in 2005. But claims for new and reopened cases — particularly from Wilma — are still being filed, the fund’s trustees were told on Tuesday.
Those claims — and the mounting public debt to pay them — delayed approval of the financing twice earlier this year after the trustees for the State Board of Administration, which oversees the Cat Fund, questioned whether some of the claims were fraudulent.
But several state agencies investigating the claims uncovered a number of issues contributing to the unusual number of new and reopened claims in the last two years.
However, an increase in fraudulent activity does not appear to be a major factor, SBA executive director Ash Williams reported to the trustees — Gov. Charlie Crist, elected Chief Financial Officer Alex Sink, and Attorney General Bill McCollum.
“The incidence of fraud and illegal activity seems to be very low,” Williams said after presenting an overview of the process by which insurance fraud is detected. The process and need to sell more debt for 2005 hurricane losses was also outlined for trustees in a white paper submitted for Tuesday’s meeting.
Williams went on to say that there are various factors affecting losses, including appraisal provisions, insurance replacement requirements, time limits on claims, and adjuster compensation practices.
In addition to a generous amount of time policyholders have to file claims, there has been an explosion of public adjusters in Florida since an unprecedented number of major hurricanes battered the state — four each in 2004 and 2005.
“Public” adjusters in Florida are state-licensed individuals who are paid by policyholders to help prepare, file, and adjust insurance claims.
Today, there are 3,000 independent adjusters compared to 700 just three years ago. Their fees are capped at 10% of what they recover for clients in newly filed claims. However, their fees are not capped for reopened claims.
The state Office of Insurance Regulation reviewed claims involving reopened cases between 2004 and 2009 that were reported by 32 insurance companies operating in the state representing 76.4% of the property insurance market.
Of 7,864 reopened claims, 2,804 or 36% of the total claims were reopened 3.5 to 4.4 years after the initial claim was filed and public adjusters were involved in 68% of those claims, the OIR found.
The second-highest number of claims, 1,192 or 15% of the total, was reopened 2.6 to 3.4 years after the initial claim and public adjusters were involved in 82% of them.
The third highest number of claims reopened, 678 or 9% of the total, were reopened between 4.6 and 5.5 years and public adjusters were involved 92% of the time.
The OIR concluded that public adjusters were involved in 5,131 or 65% of claims reopened between 2004 and 2009.
Another complicating factor fostering the number of reopened claims is that Florida law currently gives a policyholder up to five years to contest a claim. And once a claim is reopened, the policyholder gets another five years to contest it.
For hurricanes that hit the state in 2004, the time limit to file to reopen claims is in June. For hurricanes in 2005, the cutoff for reopening claims is July 2011.
Some public adjusters have placed flyers on doors, advertised on billboards, and conducted other kinds of marketing to entice homeowners in areas damaged by hurricanes to consider reopening their claims, Jack Nicholson, chief operating officer of the Cat Fund, said in an earlier interview.
“It would be easy to conclude [that public adjusters] are part of what is driving things,” Nicholson said. “To go a step and say it’s illegal or improper we can’t conclude that. There are situations in the law that certainly allow for claims to escalate.”
The allowable time frames to reopen a claim and other issues are addressed in bills before the Florida Legislature.
But history shows that settling insurance claims is a long process.
It took a decade to settle claims from Hurricane Andrew in 1992 — a Category 5 and the most powerful kind of hurricane on the scale that measures tropical storms.
Andrew slammed South Florida and led to the insolvency of a number of private insurance agencies while some stopped writing property insurance policies in the state. Private industry contraction was the impetus for the Legislature to establish the Cat Fund as a low-cost reinsurance program, and to create Florida’s Citizens Property Insurance Corp., which provides windstorm and regular property insurance in areas throughout the state where private market insurance is not available.
By December of last year, the Cat Fund had paid insurers $3.84 billion for losses in 2004 and nearly $5 billion for losses in 2005. The estimated total amount of losses because of claims that are still expected to be filed could boost those losses to $3.95 billion and $5.7 billion, respectively.
The storm activity in 2005 exceeded the available cash on hand to pay claims, which is why the Cat Fund was forced to issue debt in 2006 for the first time in its history and again in 2008.
Details about the structure of the upcoming $710 million offering are not yet known, but Williams said Tuesday there remains a possibility that the fund needs to sell additional debt for 2005 claims after bonds are sold in May.
The claims activity related to the 2005 storm season behaved unlike any other, including the four hurricanes that struck in 2004, according to Williams.
“It makes no sense,” he said. “But it seems to be largely a consequence of deterioration in the economy and an increase of adjusters, and accumulative effects of very consumer-friendly insurance laws in Florida.”
The SBA trustees in approving the sale Tuesday also named the syndicate that will sell the bonds.
JPMorgan will be the book-runner while Goldman, Sachs & Co., Citi, and Barclays Capital will be co-senior managers.
Other underwriters participating in the transaction are Morgan Stanley, Bank of America Securities Merrill Lynch, Wells Fargo Securities, RBC Capital Markets, Jefferies & Co., Morgan Keegan & Co., SunTrust Robinson Humphrey Inc., Ramirez & Co., Loop Capital Markets LLC, BB&T Capital Markets, M.R. Beal & Co., and Siebert Brandford Shank & Co.