Florida Cat Fund expects to remain in the black despite Hurricane Irma

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BRADENTON, Fla. - Flush with cash and other liquid resources, the Florida Hurricane Catastrophe Fund expects to end the year in the black even with hurricane-related payouts.

The advisory board for the so-called Cat Fund learned Thursday that its consulting actuary estimates that the state-run reinsurer’s share of Hurricane Irma losses could range between $3 billion and $6 billion, with a “conservative” mid-point projection of costs at $5.1 billion.

With cash and other resources on hand totaling $18.7 billion, it is not anticipated that the nonprofit state-run insurer will need to issue bonds to pay for damage claims.

“We are in relatively good shape,” financial advisor Kapil Bhatia, with Raymond James & Associates Inc., told the board about the fund’s current bond capacity for the 2017-2018 contract year.

Should the Cat Fund need to issue bonds to pay for claims, Bhatia said it is believed based on an average of estimates from five senior managers that the agency could borrow up to $7.9 billion of debt.

For the contract year between June 1, 2017 and May 31, 2018, the Cat Fund’s maximum potential payment liability is $17 billion.

The fund has total liquid resources on hand of $18.7 billion. That amount consists of a projected year-end cash balance of $15 billion; risk transfer or reinsurance of $1 billion; and $2.7 billion of bond proceeds available from pre-hurricane debt issued in 2013 and 2016.

Those resources provide the fund with $1.7 billion more than the maximum potential liability it has for payments, plus the capacity that senior managers believe the fund could raise in the bond market.

The Cat Fund also has very strong debt repayment capabilities, Bhatia said, adding that it is seen as a credit strength. Bonds would be secured by assessments on all property and casualty insurance policies in the state except workers’ compensation, medical malpractice, federal flood, and accident and health lines.

The assessment base is more than $43 billion, a factor that leads Fitch Ratings and S&P Global Ratings to assign AA ratings to the Cat Fund’s bonds. They are rated Aa3 by Moody's Investors Service.

But it is still early in the recovery process, officials cautioned, citing historical evidence that claims were received several years after Hurricane Charley in 2004 and Wilma in 2005.

Hurricane Irma initially made landfall in the Florida Keys Sept. 10 as a Category 4 hurricane, but quickly weakened to a Category 1 storm by the next day as it traveled the length of the state causing damage and widespread power outages. The lack of power has been blamed for causing 14 deaths at a Hollywood nursing home.

Paragon Strategic Solutions Inc., the Cat Fund’s consulting actuary, estimates that the fund’s share of losses could range between $3 billion and $6 billion.

“Losses are only beginning to develop and there is significant uncertainty regarding the ultimate loss amount,” said the debt capacity report by Raymond James.

Anne Bert, chief operating officer for the fund, said Thursday that initial loss estimates reported by Paragon are based in part on initial reports filed by participating insurers.

The estimates also considered the progression of claims received years after Charley and Wilma.

“These are very preliminary numbers,” Bert said of the Irma estimates. “It is difficult to figure what we think the natural progression [of final losses] will be.”

The Florida Hurricane Catastrophe Fund is a tax‐exempt trust fund created by the state of Florida in 1993, a year after Hurricane Andrew decimated south Florida.

After Hurricane Andrew, many commercial insurance companies became insolvent and some stopped writing policies on residential properties, threatening to undermine the real estate market.

The Florida Legislature created the Cat Fund to stabilize the property insurance market by providing contractually specified coverage that provides reimbursement for a portion of residential property insurers’ hurricane losses. Participation in the fund is mandatory, though there are exceptions.

The Cat Fund has a private letter ruling from the Internal Revenue Service, which it uses as a basis to issue tax-exempt bonds.

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