Florida’s FHCF lacks liquidity for hurricane Ian repeat, assessments likely


The Florida Hurricane Catastrophe Fund (FHCF), the fund that provides a reinsurance like reimbursement for a portion of residential property insurers’ hurricane losses, lacks the necessary liquid assets to pay out without needing to issue post-event bonds, likely backed by assessments, if a repeat of the magnitude of hurricane Ian were to occur.

The FHCF’s latest actuarial estimate for its losses from last year’s hurricane Ian is for a burden of between $6 billion and $13 billion to fall to it, while its actuary continues to project an ultimate loss amount of $10 billion for the storm.

“There is significant uncertainty regarding the ultimate loss amount as losses are just beginning to develop,” a May 17th report states, adding “there is no guarantee that actual losses will fall within the projected range.”

The FHCF’s latest claims paying capacity report shows that the fund has some $7.2 billion in liquid resources available for the coming hurricane season.

Those resources are in the form of $3.7 billion of projected year-end fund balances, as well as $3.5 billion in pre-event bonding already secured back in a 2020 debt issuance.

If the FHCF’s share of the Florida P&C insurance industry’s hurricane losses rise above the $7.2 billion level this year, the remainder would need to be financed through post-event bond issuances, of which it estimates $8.6 billion could be available.

Alongside $2.2 billion in insurance industry co-payments, and based on a statutory maximum potential liability for the FHCF of $17 billion, it leaves a $1.2 billion shortfall as well, were a truly historic hurricane loss to occur in Florida.

Were an event to occur, the pre-event bonds are assumed to be left outstanding, so they can roll-over to the next year, while post-event bonding would be the most likely sources of funding, making the total estimated claims‐paying capacity of the FHCF $12.3 billion, covering some 72% of the statutory $17 billion maximum liability.

Whatever way you look at it there is a gap, between the FHCF’s liability for a major hurricane with the magnitude of industry losses that hurricane Ian caused, and the amount of claims it would need to pay, with that gap likely to be filled by bonding.

While the FHCF believes capital market conditions would support its post-event bonding needs, it would likely need to exercise its ability to levy emergency assessments on all Florida property and casualty insurance lines except workers’ compensation, medical malpractice, federal flood, and accident and health lines.

Assessments fall to taxpayers, meaning costs for every Floridian, potentially.

The FHCF report does not that what could constrain its ability to meet its maximum reimbursement obligation after a major hurricane event in Florida, is its access to markets and the availability of capacity there, to support post-event bond issuances.

On market volatility, the FHCF report states, “The financial markets are currently in flux as interest rates have significantly increased and are currently very volatile due to global macroeconomic factors such as the banking crisis, Russia’s invasion of the Ukraine, and actions by both the Federal Reserve and global central banks to combat inflation that is at historically high levels not seen since the 1980’s. Credit spreads have widened due to the volatility in the fixed income markets – even for high‐grade credits such as the FHCF – therefore, we have utilized rates of 7% for the initial season and 9% for the subsequent season, which are “above market” rates.”

The FHCF secured its 2020 bonds without issue, but things have changed significantly since that time.

“Significant time has elapsed since the 2020 transaction; interest rates have signficantly increased and market access can never be guaranteed, especially in volatile times or after an event or multiple events either in Florida or globally. Therefore, it is critical to understand the potential challenges the FHCF may face after an event,” the report explains.

The report also warns, “One additional note of caution is that financial markets and risk transfer markets can be highly volatile and uncertain at various times, as seen in today’s current environment. As such uncertainty is currently present, this may create an additional risk for participating insurers who rely on the FHCF for reimbursements. It is never possible to guarantee financial market conditions for very large issuances or into the future for long‐term sustainability of the FHCF. The FHCF’s estimated post‐event borrowing capacity is subjective and depends heavily on the opinions of its five senior managing underwriters and our evaluation and analysis of their responses to our questions.”

Which brings us to reinsurance, risk transfer and potentially even catastrophe bonds.

The FHCF used to buy a traditional reinsurance program, that had included quite significant use of collateralized capacity provided by insurance-linked securities (ILS) players.

However, the last time it renewed any reinsurance was in 2019, $920 million of protection, but then stopped the next year, finding market conditions weren’t conducive around the 2020 renewal season.

Reinsurance market conditions are unlikely to look any more attractive to the FHCF now, given the hardening of pricing seen, while catastrophe bond spreads are now significantly higher than they were in 2019 and prior.

The FHCF’s funding status is significantly worse though, having been eroded by hurricane Ian last year.

Could that make reinsurance, or securing capacity in the form of catastrophe bonds more appealing?

Unfortunately, it seems unlikely, given while many politicians find the threat of exposing taxpayers to costs through assessments difficult, the current Florida leadership appears to have more of an issue with paying for something upfront.

Risk transfer, in reinsurance, cat bond, or ILS form, would at least lock in additional claims paying capacity upfront for the FHCF, reducing the need for assessments after hurricanes and lowering the FHCF’s exposure to financial market volatility when it comes to issuing bonds.

While reinsurance and cat bonds are always likely to be more costly than issuing debt, there is something to be said for diversifying the sources of capital and instruments that make up the FHCF’s funding, to provide greater certainty reimbursements can be fully made to Florida’s residential P&C insurers when disaster strikes.

Read all of our news and analysis on the Florida insurance and reinsurance market.

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