BRADENTON, Fla. The Florida Hurricane Catastrophe Fund should be less reliant on using municipal bonds to pay its bills in the future, and work on decreasing its exposure, the advisory board was told.
Board member Don Brown said Tuesday that he is concerned about the fund piling on more debt.
“We may get a shock one day,” he said, adding that the fund should be more diverse in the strategies it uses to pay claims.
The state-run, nonprofit FHCF’s current total loss exposure is $17 billion.
Because the Sunshine state hasn’t been hit by a major storm since 2005, the so-called Cat Fund’s cash resources are at an all time high at $11.76 billion.
After the cash has been expended, finance experts project that up to $6.1 billion of bonds could be sold if needed by the fund, which was created to stabilize the property insurance market a year after Hurricane Andrew slammed south Florida in 1992 as one of the strongest storms ever to hit the state.
In a bi-yearly report on current market conditions, financial advisor Kapil Bhatia with Raymond James said there are inherent risks projecting capacity in the bond market, which are now more difficult due to the budget and debt ceiling stalemate in Washington and lingering questions about when the Federal Reserve will taper measures to boost the economy.
The Cat Fund’s cash includes a projected year-end fund balance of $9.76 billion and $2 billion of taxable notes sold in the bond market in April for liquidity. The note proceeds act as a bridge to pay claims quickly if needed. Until then they are invested to pay back the debt.
Should the FHCF require $17 billion to pay claims if another catastrophic storm hit Florida, the obligation would be funded using cash on hand and selling $5.23 billion of bonds to make up the difference.
While such bonding needs are extremely large by municipal market standards, Bhatia said it is believed that $5.23 billion can be sold because the amount most likely would be secured in a series of issuances over a year or more using tax exempt and taxable bonds to optimize borrowing costs.
“We think $5.26 billion is achievable,” he said, adding that predicting capacity is an “inexact science.”
The fund’s current ability to borrow is based on an estimated total bonding capacity of $6.1 billion, according to Raymond James and surveys of the fund’s senior underwriting firms - Barclays, Citi, Goldman Sachs & Co., and JPMorgan.
In May, the fund’s bond capacity was estimated at $7.3 billion.
The lower amount currently available reflects the $2 billion of notes sold in April that should be absorbed by investors next year, said Bhatia.
That deal by the double-A rated Cat Fund was a success, and proved that “there is significant capacity for the fund to issue bonds at cost-effective rates,” a report by Raymond James said.
The Cat Fund’s finances have been improving but not because of improvements in the bond market, said Brown, an insurance agent from DeFuniak Springs and former state legislator.
The fund’s obligations have decreased, and its cash position increased because some insurers are selecting less coverage, a so-called “rapid cash build-up factor” has allowed the fund to accumulate cash at a faster rate, and there have been no major hurricane losses in nearly eight years, he said.
“I don’t want it to be lost on us that we have gone a longer period of time in Florida than any time in recorded history” without a hurricane making landfall, he said. “We are sort of living on borrowed time. Another perspective would be we’ve been very blessed.”
Relying on the bond market just because it’s accessible is foolish, said Brown, adding that the FHCF should rely on prudent fiscal management.
After the meeting, he said legislators should reduce the amount of insurance that is offered, and the fund should keep more claims paying capacity on hand for future storms.
He also suggested that the fund should take “advantage of abundant and relatively inexpensive private market risk transfer opportunities,” including the use of taxable catastrophe bonds.
In an update on market conditions, the council heard about the impact of rising interest rates since the fund sold $2 billion of taxable notes in April.
The notes sold with 3, 5, and 7-year maturities at an all-in cost of 2.61%, which was less than the 3% borrowing rate anticipated by underwriters. The deal was oversubscribed by 1.79 times.
If the debt was sold today, the cost would be higher by 75 basis points to 80 basis points “if not more,” Bhatia said.
Since the last bond capacity report was done in May, Bhatia said interest rates in the bond market have gone up because of speculation about when the Federal Reserve will begin tapering quantitative easing measures.
In addition, the markets are being influenced by the lack of fiscal policy as well as Congress’s inability to pass a budget and increase in the debt ceiling cap.
“Washington is actually hurting the economy with talk of the budget and debt cap,” he said.
While it is believed that future borrowing capacity will be available when needed, Bhatia said there is inherent risk in the marketplace that makes it “hard to predict, and its getting harder and harder with what is happening in Washington itself.”
The Florida Hurricane Catastrophe Fund is a tax-exempt trust fund created by the Florida Legislature in 1993 after Hurricane Andrew, when many private insurance companies became insolvent or left the state.
The fund provides coverage for hurricane loss reimbursement to participating insurers at a cost lower than they can obtain in the private reinsurance market.
Most property insurers are required to participate in the fund, including state-run Citizens Property Insurance Corp., and they pay annual premiums.
At the end of fiscal 2012, the fund had reimbursed insurers $9.3 billion for hurricane losses in 2004 and 2005.
To pay claims for those two years, the FHCF issued $1.35 billion of revenue bonds in 2006, $625 million of revenue bonds in 2008, and $675.9 million in 2010. The bonds are secured by special assessments on nearly all property insurance policies in the state.
About $1.55 billion of tax exempt revenue bonds are currently outstanding.
The fund also issued $3.5 billion of taxable notes in 2007 to provide liquidity to quickly pay claims. The proceeds were not needed for claims, and they matured Oct. 15, 2012. The $2 billion of taxable notes sold earlier this year serve the same purpose.
The Cat Fund’s bonds are rated AA by Fitch Ratings, Aa3 by Moody’s Investors Service, and AA-minus by Standard & Poor’s.