The Swiss Re Group, one of the world’s largest reinsurers, reported on December 1 that, this year through November, worldwide disasters, natural and man-made, caused economic damage of $268 billion, of which $122 billion was insured. Note that the damage is more than double the insured property. Hurricane Ian was the single largest loss-causing event of the year, with estimated insured losses of $50–65 billion, second only to Hurricane Katrina’s $100 billion. Insured losses from natural disasters alone already tallied $115 billion this year, well above the 10-year average of $81 billion. The secondary perils of floods and hailstorms caused over $50 billion in losses and have been increasing, as we all know and see with longer-lingering storms.
FEMA also reported on December 1 more than $3 billion in funding to Florida from various federal entities. Florida notes in an October 30, 2022, report that it has substantial liquidity to forward necessary funds and provide liquidity to localities throughout the state, as it awaits federal funding and insurance proceeds.
Florida has a strong economy and fiscal management, and its general-obligation bonds are rated AAA/Aaa/AAA by S&P, Moody’s, and Fitch. Environmental risks are high, but so is the resiliency of the state due to strong reserves that are projected to be $20 billion for fiscal year end June 30, 2023. The state has conservative budgeting; for example, it does not forecast revenue growth to match 2021 level until 2026, yet still projects strong reserves. Florida’s largest source of revenue is sales tax. The state has a diverse economy and has experienced strong population growth. Florida has a good pension funded level of 74% for fiscal 2020, as reported by Pew Charitable Trusts. This figure compares to an average of 69.5% for all states. We have noted in past commentaries that pension funded levels are an important determinant of credit quality.
As has been widely reported, insurers continue to leave Florida, limit coverage, or fail, not just because of more-frequent storms but also because of elevated levels of court trials and insurance fraud. An October Bankrate report notes that Florida accounts for 7% of insurance claims but 97% of insurance lawsuits, many of them fraudulent. The fraudulent lawsuits and the high overall claim risk in Florida mean that insurance companies have faced two consecutive years with net underwriting losses of over $1 billion.
The Surfside condominium collapse has complicated the Florida and national insurance market, too, assuredly raising costs. There will be more focus on building collapses and other engineering deficiencies that need to be assessed. Insufficient coverage means more focus on insurance policy levels in relation to property values. Insurance for construction projects will need to take into account risks to adjacent buildings and how those risks will increase cost and availability. There will be additional layers of engineering review for new construction and existing condominiums and building codes, and permit times will likely increase.
In May 2022, the state passed an insurance reform package to address the insurance challenges from natural disasters, sea level rise, and heightened litigation. Included is a state investment of $2 billion to fund the Reinsurance to Assist Policyholders (RAP) program, which will defray costs to insurance companies to attain reinsurance for catastrophic events and to provide $150 million for hurricane mitigation and matching grants to homeowners.
There is still work to be done, and a legislative session scheduled for December 12–16 is expected to further address the insurance market in Florida.
The state legislature established the Florida Hurricane Catastrophe Fund (FHCF) in 1993 after Hurricane Andrew’s $30 billion in losses (in today’s dollars) caused an exodus of insurers from the state. FHCF provides a type of reinsurance or reimbursement to insurers for a portion of their hurricane catastrophe losses. It has amassed $16 billion in resources to provide reimbursement to insurers. The funds are derived from premiums, pre-event bond proceeds, and investment earnings. Insurers operating in the state are required to participate. The fund, through the State Board of Administration, may issue “post-event” bonds. The pre and post event bonds are rated AA by S&P and Aa3 by Moody’s, based on the breadth of the assessment base, which includes assessments on property and casualty insurance premiums paid in the state, including car insurance policies.
In 2002, the state formed Citizens Property and Casualty Corporation (“Citizens”), a P&C insurer of last resort. Citizens participates in the FHCF for catastrophe coverage. If needed, Citizens may levy assessments on policyholders to bolster capital levels. Citizens is rated A+ by S&P and A1 by Moody’s based on the strength of the assessment base and management by the state. There are also specialty ratings companies that focus on the insurance industry, such as A. M. Best and Demotech, which have different rating scales and methodologies. These ratings are important to those in the insurance industry, and the downgrading of Florida insurers is also contributing to insurers leaving the state.
Insurers of last resort are not unusual. Many states have FAIR (Fair Access Insurance Requirements) companies like Citizens. And 25 years ago, the California Earthquake Authority was established. California has over time implemented standards for buildings to withstand earthquakes, just as Florida has been increasing building standards for homes to be wind- and water-resistant. States have insurance commissions to regulate the industry and entities to backstop failed companies so that valid insured-customer claims are paid. For example, when a company becomes insolvent, the Florida Insurance Guaranty Association (FIGA) takes on any claims that still need to be paid by that company. FIGA’s board and the Florida Office of Insurance Regulation (OIR) can institute assessments to help cover the costs of open claims associated with liquidated companies.
We have mentioned assessments on insurance policy premiums in connection to FHCF and Citizens to help pay claims and bondholders. However, until this year, the past few years have seen fewer damaging events; and FHCF and Citizens resources have grown, minimizing the need for assessments. The damage from Ian is expected to be manageable; but the potential for increased storms and higher damage estimates from growing development, in combination with the other insurance issues facing the state, indicate the state needs to remain vigilant. Citizens has grown to be one of the largest insurance companies in the state, but the intent of the principle of “insurer of last resort” was not that the insurer become the largest in the state.
Changing climate and weather are challenging many states, including those that were not generally subject to severe flooding in the past but confront it now because of longer-lingering storms. Increasingly, extreme heat is becoming a serious challenge that does not cause obvious physical damage but is uncomfortable and can be dangerous to some. These risks may affect people's decisions to move to, or away from a state, which can contribute to credit strength or weakness. Florida may benefit by managing well through storms and improving storm response, infrastructure, and economic resiliency — as well as its insurance market.
Cumberland Advisors is in Sarasota, Florida, having moved there from New Jersey in 2010 after our founders made a close study of tax treatment, the economy, and quality of life. Our fixed-income strategies invest mostly in highly rated municipal bonds including taxable municipal bonds. We are keenly aware of the environmental, social and governance risks that need to be evaluated and look for how a municipality intends to mitigate those risks, as we have described in our recent ESG commentaries. Municipal bonds are a natural ESG investment because the bond proceeds fund education, housing, clean water, hospitals, roads, and bridges. The measurement of the risks that munis face is improving, and there are efforts to improve municipal disclosure through the Financial Data Transparency Act pending in Congress. Many municipalities and states, including Florida, now have a chief resiliency officer who evaluates government activities through a resilience lens.
Patricia Healy, CFA
Senior Vice President of Research & Portfolio Manager
Email | Bio
Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.
Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
