Florida Cabinet Approves $710 Million in Florida Hurricane Catastrophe Fund Bonds; Emergency Assessment

Apr 15, 2010


Citizens Reports Financial Condition

In a presentation to the Florida Cabinet at its April 13, 2010 meeting, Citizens Property Insurance Corporation (“Citizens”) Chief Financial Officer Sharon Binnun reported that Citizens is in such sound financial condition that its claims-paying ability — over $14 billion — is more than twice the total amount of claims it has paid for all eight hurricanes that struck the state in 2004 and 2005.

Further, Citizens has benefited from four meteorologically quiet summers and favorable bond market conditions that have solidified its financial stability.  Moody’s, the credit- and risk-analysis company, recently raised its rating of Citizens’ financial condition from negative to stable as a result. 

From its existing cash surplus, Citizens could pay the likely claims and claim adjustment expenses resulting from a Hurricane Wilma-sized event, the cost of which is estimated at $1.5 billion. Even claims from a much-stronger, 1-in-25-year hurricane could be covered without emergency assessments or post-event bonding, she said.

Claims resulting from a 1-in-50-year storm — one with the disastrous impact approximating that of Hurricane Andrew in 1992 — would trigger emergency assessments, but only for Citizens’ High-Risk Account.   Even in such a catastrophe, Ms. Binnun predicted Citizens would not require post-event financing.

She also noted that, although Citizens has become the largest insurer in Florida, its relative size and exposure has declined during the last three years.  The total value of property covered by Citizens has decreased by 20 percent, while its number of policies in force has decreased by 28 percent and its estimated Probable Maximum Loss has declined by 10 percent.

John Forney of Raymond James and Associates, who serves as an advisor to Citizens, told the Cabinet that the insurer’s recent $2.4 billion bond sale — at an interest rate 15 basis points lower than a similar offering last year — indicates that the financial market has “incredibly endorsed the credit construct” of Citizens.

To review Ms. Binnun’s and Mr. Forney’s presentation to the Cabinet, click here.


Cabinet Discussion

After Ms. Binnun’s presentation, Florida Commissioner of Agriculture and Consumer Services Charlie Bronson reminded the Cabinet that, after the second year of multiple hurricanes in 2005, the Florida Legislature allocated $714.7 million from General Revenue Funds to reduce Citizens’ insurance assessments.  Likening rate increase requests to assessments, he added that private insurance companies are not afforded the capacity to assess across multiple lines of insurance like Citizens is, and called for a “leveling of the playing field as to what we’re doing with Citizens versus the private insurance industry.”

Commissioner Bronson emphasized that Citizens is “being supported by the full faith and credit of the people of Florida” and said he didn’t believe that the average Floridian understood this concept.

Expressing displeasure at the notion of authorizing additional assessments even though the number of Citizens policies has decreased, Florida Attorney General Bill McCollum asked Ms. Binnun to clarify whether Citizens assessments are accumulated in a pool from which funds are drawn to pay for catastrophes, or whether assessments are made based on a per-event basis.  Ms. Binnun responded that assessments are levied in response to events.

Florida Governor Charlie Crist remarked that, while Citizens assesses “only if a storm hits,” private insurers have requested rate increases “as though a 1-in-100-year storm is going to hit.”

Florida Deputy Insurance Commissioner Belinda Miller, who attended the meeting on behalf of Florida Insurance Commissioner Kevin McCarty, explained that private insurers pay for reinsurance, thus transferring risk.  She explained that Citizens was not designed to transfer risk to the private market and, because it functions as more of a self-insurance mechanism, achieves better cost-effectiveness by financing its own risk.  The original intent of Citizens, added Ms. Miller, was not to build up enough surplus to pay for a 1-in-100-year event each year.   To illustrate the concept of Citizens’ assessments, she used the analogy of shareholders having to contribute toward the recapitalization of a company.

Ms. Miller said she would like to see Citizens be “as small as we can make it so that most of the risk is covered by the private market.”   Her personal preference would be for the Florida Legislature to withdraw Citizens’ authority to write high-risk, windstorm-only polices, thereby leaving such coverage to be written by private insurers.  She nevertheless reaffirmed the critical role Citizens plays in protecting Florida’s economy from the financial consequences of a catastrophic event.

“If we didn’t have Citizens’, I don’t know how our economy would continue,” she concluded.

During the discussion, Attorney General McCollum called for a separate discussion to be held in the future for the purpose of evaluating the potential impact on the Florida insurance market if Citizens were to be returned to its former status as the State’s “insurer of last resort.”


Emergency Assessment, $710 million in Florida Hurricane Catastrophe Fund Bonds Approved

To reimburse insurance companies for additional claims relating to hurricanes that struck the State of Florida during 2005, the Florida Cabinet authorized the sale of $710 million in Florida Hurricane Catastrophe Fund (“FHCF”) post-event revenue bonds.  This financing is intended to cover aggregate FHCF claims of $827 million, for which approximately $213 million in reserves was reported to be available.  To secure the bonds, an FHCF emergency assessment also was approved as part of the State Board of Administration’s (“SBA”) Cabinet agenda.

In approving the 2010 FHCF Reimbursement Premium Formula, the Cabinet included two versions of the 2010 FHCF Rates:  one that reflects the current law and the other is contingent upon CS/SB 1460 become law.   Concurrently, the Cabinet authorized the filing of a Notice of Proposed Rulemaking for Rule 19-8.028, F.A.C., Reimbursement Premium Formula.   The proposed Rule will be filed for final adoption if no public hearing is requested. 

In his presentation to the Cabinet, SBA Executive Director Ash Williams discussed the FHCF claims process and emphasized its integrity as evidenced by its thorough examination process and comprehensive proof of loss reports. 

He explained that FHCF loss payment requests are carefully reviewed, analyzed and required to have the signature of two executives from the insurance company making the request.   Mr. Williams said that the FHCF’s extensive claims analysis process has revealed some “extraordinary” disparities in loss experience among companies sharing business in similar geographical areas.   Over 17,000 FHCF loss reports from the 2004-2005 hurricane seasons have been reviewed, from which the FHCF is withholding $13.2 million in related reimbursements.  Meanwhile, $43 million in excess reimbursements has been recovered.

Governor Crist remarked that, based upon statistics in Mr. Williams’ presentation, the incidence of homeowners’ insurance-related fraud seems low at 4.23 percent.  Mr. Williams clarified that this number represented a percentage of aggregate convictions across all lines of insurance over the course of a one-year time period.

Since 2004, about two million claims covering all forms of insurance in Florida have generated about 66,000 fraud tips – 46,000 of which are from insurers.  This resulted in the opening of over 9,000 cases that led to 4,700 arrests, 5,000 prosecutions and about 3,000 convictions.  Rewards paid for successful tips amounted to about $140,000.  Mr. Williams also told the Cabinet that a recent review determined that the level of suspected insurance fraud in Florida “seems to be extremely low.”

The meeting was then adjourned.

To access the complete April 13 Cabinet agenda, which includes hyperlinks to the Florida Office of Insurance Regulation, SBA and Florida Hurricane Catastrophe Fund Financing Corporation agendas, click here.

The next Cabinet meeting is scheduled for April 27, 2010.


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