Florida Hurricane Catastrophe Fund Financing Observations and Perspective Presented to 2009 Summer Insurance Symposium June 2, 2009 Destin, Florida
Introduction John Forney, CFA Managing Director, Public Finance Raymond James & Associates, Inc. Clients include: -- Florida Hurricane Catastrophe Fund -- Citizens Property Insurance Corporation (FL) -- Florida Insurance Guaranty Association -- California Earthquake Authority -- Louisiana Citizens Property Insurance Corporation
Presentation Outline Section I What Does the Florida Insurance Market Look Like? Section II Why Does it Look Like That? Section III Section IV What is the FHCF s Role in the Market? Where Do We Go From Here? 2
Section I What Does the Florida Insurance Market Look Like? 3
Florida Residential Property Insurance Market = Quasi governmental entity Private Reinsurers Bermuda 70% Lloyd s 14% Europe 10% U.S. 6% FHCF ($29 B in coverage; approx. 50% mkt share) FIGA (Florida Insurance Guaranty Assoc.) Private Insurers (5 mm policies; 205 insurers Pups 22% FL Stand alone 38% Other 10% Citizens (1.1 million policies; 30% market share) Residential Policyholders (6.3 million risks, average residential premium $1,600) $10.1 billion residential premium (estimated), representing $2 trillion of insured property value 4
Top 10 Residential Property Writers in Florida* (as of 9/30/08) Policies Direct Written Premium Market Company Name in Force Premium Share Citizens Property Insurance Corporation 1,157,568 $2,634,549,525 27% State Farm Florida Insurance Company 933,140 $1,235,634,528 13% Universal Property & Casualty Insurance Company 450,162 $520,782,661 5% St. Johns Insurance Company, Inc. 196,159 $284,614,156 3% QBE Insurance Corporation 3,290 $213,634,023 2% Royal Palm Insurance Company 129,481 $212,696,314 2% United Services Automobile Association 167,958 $206,889,858 2% Liberty Mutual Fire Insurance Company 101,617 $167,524,690 2% Homewise Preferred Insurance Company 106,648 $165,946,316 2% Florida Peninsula Insurance Company 94,962 $156,716,480 2% TOTAL - Top 10 Residential Property Writers 3,340,985 $5,798,988,551 59% TOTAL - All Residential Property Writers 6,115,030 $9,786,050,514 100% Note: Top 10 list is determined based on premium written for all residential policies statewide. * Source: Florida Office of Insurance Regulation, Quarterly Supplemental Report 5
Section II Why Does it Look Like That? 6
The Reasons Why Hurricanes + + Politics
Florida Has More Expected and Potential Losses Than All Other States from Texas to Maine COMBINED!
The Catastrophe Continuum 1992 Andrew ($15.5 B) 1994 Northridge ($12.5 B) 2001 WTC ($18.8 B) 2004 2005 2008 Four Storms Four Storms Gustav, Ike, Global (Charley, Ivan, (Dennis, Katrina, Financial Frances, Jeanne Rita, Wilma Meltdown ($18 B) ($58 B) ($??? B)
Shocks to the System Hurricane Andrew, 1992 Total insured losses around $15 B State Farm s losses ($4.6 B) were equal to the entire capital of State Farm P&C at the time Northridge Earthquake, 1994 Total insured residential losses (around $14B) exceeded the cumulative dollars ever collected for earthquake insurance in CA Seven of ten most costly U.S. catastrophes have occurred since 2004
What They Have in Common Large, lumpy, unpredictable losses with the possibility to be much larger --- There are over 250 stochastic storm sets that could produce in excess of $100 billion of losses in Florida Repeat of 1906 SF earthquake today could cause over $400 billion in losses There is a 99.7 percent chance that California will be struck by a magnitude 6.7 earthquake or larger in the next 30 years
Lessons Learned Extreme difficulty of insuring losses from natural catastrophes Several standard conditions of insurability violated "I am quite happy to see this business under government control." --Jürgen Gräber, Executive Board Member, Hannover Re Fragility of investment assumptions Returns are not normally distributed Modern portfolio theory increasingly called into question Read The Misbehavior of Markets by Mandelbrot
Primary Result Increasing trend toward government involvement in the catastrophe insurance/reinsurance business FHCF 1993 CEA 1996 TRIA 2002 Citizens (FL) 2002 Citizens (LA) 2003 HR 3355-2007 Prediction: This Trend Will Continue
Section III What is the FHCF s Role in the Market? 14
Florida s s Main Response the FHCF The FHCF is a tax-exempt trust fund administered by the State Board of Administration and created by the State Legislature in 1993 to act as a reinsurer for direct property and casualty insurers in the State; with limited exceptions, participation in the FHCF is mandatory for insurers writing residential property insurance policies in the State. The FHCF functions like a reinsurer it collects premiums from customers and reimburses them for covered residential losses; however, the FHCF has statutorily limited liability and the unique abilities to assess a broad and diverse base of P&C insurance premiums around the State to make up any shortfalls after a storm and to issue tax-exempt bonds secured by those assessments. Because of its tax-exempt status and assessment capability, the FHCF is able to charge significantly lower premiums than would a private reinsurer for similar coverage; it therefore contributes to lower overall residential property insurance premiums in the State. 15
Understanding the FHCF s Obligation The FHCF is obligated to its year-end cash balance and bonding capacity. The maximum obligation is limited by law resulting from adjustments to the mandatory coverage and the offering of optional coverage (TICL). The FHCF is required by law to publish its claims paying capacity in May and October of each year. This is designed to given insurers information in order to purchase their private insurance programs. The FHCF is unique in how it operates it cannot become insolvent, but its capacity is highly dependent on the financial markets. The FHCF s capacity may change over the course of the hurricane season and may change over the course of the entire claims paying cycle which could extend over a period of years. 16
The FHCF Has it Worked? Year Premium Revenue Savings to Florida Policyholders Hurricane Losses Assessments Levied ($ in millions) ($ in millions) 1 ($ in millions) ($ in millions) 2000 438 657 2001 439 659 2002 478 717 2003 498 747 2004 488 732 2005 617 926 3,950 2006 735 1,103 5,200 1,350 2007 1,334 2,001 2008 1,294 1,941 625 Total 6,321 9,482 9,150 1,975 Return on Investment for Florida Policyholders 338% 1 Assumes FHCF cost is 1/3 of private reinsurance cost and 50% of premiums are ceded to reinsurers 17
D-R-A-F-T Prior to HB 1495 2009/2010 Initial Season Mandatory & Optional Coverages Available Not Official Premiums 51.9 Years-- 1.9% $ 288 M 32 Years 3.1% $ 1,029 M $39.64 B $26.31 B $1.33 B $1.91 B Industry Co-Payments $29.175 Billion Capacity $12.000 B optional TICL available TICL Optional $17.175 Billion FHCF Capacity (Loss Adjustment Expense is included in the capacity for all coverage layers) $12.820 B Bonding Requirement Mandatory Coverage 2.4% ROL Actual Capacity $ 12.000 B TICL $ 17.175 B FHCF $ 0 B TEACO $ 29.175 B - 4.355 B Cash $ 24.820 B Bond 6.0% ROL 14.1 Years 7.1% 9.0 Years 11.1% $1,317 M $12.06 B $ 4.355 B Projected 2009 Year-end Cash Balance $7.223 B Industry Retention 18 *Individual company retentions are their share of the industry retention. Not Drawn to scale.
D-R-A-F-T After HB 1495 2009/2010 Initial Season Mandatory & Optional Coverages Available Not Official Premiums $27.499 Billion Capacity 49 Years-- 2.0% $ 499 M $37.42 B $1.11 B $10.000 B optional TICL available TICL Optional 5.0% ROL 32 Years 3.1% $ 1,080 M $26.31 B Co-Payments $1.91 B Industry $17.175 Billion FHCF Capacity (Loss Adjustment Expense is included in the capacity for all coverage layers) $12.644 B Bonding Requirement Mandatory Coverage Actual Capacity $ 10.000 B TICL $ 17.175 B FHCF $ 0 B TEACO $ 0.324 B LAC $10M $ 27.499 B - 4.531 B Cash $ 22.968 B Bond 6.3% ROL 14.3 Years 7.0% 9.0 Years 11.1% $ 81 M $1,660 M $12.26 B $ 4.531 B Projected 2009 Year-end Cash Balance $7.223 B Industry Retention $324 m LAC $10 million Option 50% ROL 19 *Individual company retentions are their share of the industry retention. Not Not Drawn Drawn to to scale. scale.
Overview of Loss Reimbursement Funding Sources $29.175 B 2009 THEORETICAL LOSS REIMBURSEMENT CAPACITY 1:52 yrs $29.175 B 2009 PROJECTED LOSS REIMBURSEMENT CAPACITY 1:52 yrs POTENTIAL SHORTFALL $13.345 B POST-EVENT BORROWING CAPACITY* $21.345 B $15.830 B 1:28 yrs PROJECTED POST-EVENT BORROWING CAPACITY* $8.000 B $7.830 B 1:18 yrs $7.830 B 1:18 yrs $4.330 B PRE-EVENT RESOURCES $3.500 B (Series 2007A Notes) 1:14 yrs $4.330 B PRE-EVENT RESOURCES $3.500 B (Series 2007A Notes) 1:14 yrs PROJECTED FUND BALANCE $4.330 B PROJECTED FUND BALANCE $4.330 B 20 * Represents total borrowing capacity. Claims-paying capacity will be less due to costs of issuance, capitalized interest, deposit to debt service reserve fund, etc.
Citizens and FHCF 100 Year PML Event Where Would the $ Come From? CITIZENS 100 Year PML - $22.883 Billion (As of 12/31/08) (Not to scale) FHCF Potential Maximum Obligation $27 billion Total Bonding $3.476 B Assessment on all Policyholders- $3.476 Billion (15.1%) Assessment on Insurers - $3.809 Billion (16.6%) Assessments on Citizens Policyholders - $1.350 Billion (5.9%) FHCF Recovery - $10.159 Billion (44.4%) Assessments for FHCF TICL Layer - $10 Billion (36.9%) (Annual Assessments Assessment for - 2.6% FHCF for 30 TICL Layer years) $12.000 Billion (42.1%) Assessments for Original FHCF Layer - $12.6 Billion Assessments for Original (46.5%) Layer - $12.9 Billion (46.1%) (Annual Assessment 3.0% for 30 years) Total Bonding $22.9 B Surplus - $4.318 Billion (18.0%) PROJECTED FUND BALANCE $4.5 B (16.6%) Total 1-100 Citizens and FHCF non-overlapping liability =$41.724 Billion Total Estimated Available Surplus : $8.418 Billion (20.2%)
Section IV Where Do We Go From Here? 22
The Future More actuarially sound rates Better building codes and enforcement Mitigation programs Formal Federal involvement An integrated public private partnership is the only way to tackle the problem of catastrophic risk in a proactive way Under consideration: SB 886 Sen. Nelson HR 2555 Rep. Klein
The Best Answer
Florida Hurricane Catastrophe Fund Financing Observations and Perspective Presented to 2009 Summer Insurance Symposium June 2, 2009 Destin, Florida