Fitch: No Credit Implications for Florida State-Run Insurers From Hermine

Hurricane Hermine, the first hurricane to make landfall in Florida in 11 years, is not likely to have a significant impact on the financial condition of the Florida Hurricane Catastrophe Fund (FHCF) or Citizens’ Property Insurance (Citizens), according to Fitch Ratings.

A statement from the ratings agency said both entities have accumulated “exceptional levels of liquidity in the 11 years since Hurricane Wilma hit Florida in 2005.” Damage due to the storm is unlikely to challenge the resources or credit profile of either Citizens or the FHCF, Fitch noted.

Citizens is a not-for-profit, tax-exempt entity, established by Florida statute to provide coverage for those unable to obtain insurance or affordable insurance in Florida’s voluntary market. Citizens operates two distinct and financially separate credits – the Coastal Account and the Personal Lines Account/Commercial Lines Account. There is no cross-collateralization between the two credits, both of which are rated ‘AA-‘ by Fitch.

Following several years of minimal storm activity, and with an active program to return policyholders to the private insurance market, Fitch said Citizens expects to be able to meet the claims of greater than a 1-in-100-year storm event from its available resources, which include accumulated surplus and the proceeds of pre-event bond issuance. Citizens forecasts PLA/CLA could withstand claims from an estimated 1-in-250-year storm without needing to levy any emergency assessments.

Similarly, Citizens forecasts the Coastal Account could withstand claims from an estimated 1-in-125-year storm without needing to levy emergency assessments. This is an exceptional level of liquidity that Fitch assumes would be reduced if and when used to pay claims with storm activity.

The Florida Hurricane Catastrophe Fund (bonds issued by the state Board of Administration and rated ‘AA’) is a mandatory state-run property re-insurer that provides a type of reinsurance coverage through a reimbursement contract to the approximately 156-157 participating residential property insurers doing business in the state, reimbursing insurers after their hurricane-related residential property insurance losses have reached their retention limit. Participation in the FHCF program is, with limited exceptions, mandatory for insurers writing residential property insurance in the state.

The FHCF’s reimbursement obligation is limited to the lesser of its annually set statutory limit or its claims paying resources, which consist of funds on hand at the beginning of the contract year, June 1, corresponding to the start of the hurricane season; reimbursement premiums collected over the course of the calendar year; and its bonding capacity. For the contract year that began June 1, 2016, the Board is providing a total of $17 billion in coverage. Claims paying resources consist of approximately $13.8 billion in projected cash balance supplemented by $2.8 billion in pre-event financing. The balance of approximately $500 million could be covered by post-event bonding capacity.

As a reinsurer, the FHCF’s reimbursement obligation does not commence until an industry retention layer is met by the insurers. For the 2016 season, the retention layer is $7 billion, corresponding with the probability of a 1-in-9-year storm event. The need to issue additional bonds will be triggered if industry losses exceed $26.2 billion, estimated to occur after a 1-in-35-year event. Industry losses would need to reach $26.8 billion for the Board’s full exposure to have been realized, which FHCF estimates corresponds to an estimated 1-in-36-year event.