The Chickens are Coming Home to Roost in the Sunshine State: A Sup guest post

We’re always happy to feature Sup here at Slabbed whenever he gets the urge to author a post. Unlike many in the insurance industry Sup isn’t afraid to engage us and we’re very happy to have his perspective. (Note I’ve “blogified” the text minimally to add the links inline)- sop


Two articles published last week at the New York Times and Tampa Tribune indicate the folks in charge in Florida may have gotten their heads out of the sand. Governor Crist and the Legislature seem to have come to the realization that Citizens Property Insurance Corporation is broke.

What does this mean to the citizens of the state of Florida? It means they will be paying higher insurance premiums and they all must pray the state escapes hurricanes for a few years. “Citizens’ life expectancy in a storm: ‘a few short hours’ “ is stated in the New York Times article. It is clear the politicians and regulators were playing politics with this issue and it has now backfired. What these folks have done is criminal and if they were a private organization they would be prosecuted for the sham.

The second article reflects the Feds are not going to help. This article states by state law the Cat fund should be able to cover up to $29 billion, but state officials say the fund could only cover about $11 billion. Yet, the folks in charge reduced rates and forced a viable “A” rated carrier to announce it was leaving the state. Now what is going to happen when State Farm starts now renewing 1.2 million homeowner policies? Is Citizens going to shut the doors? I doubt it, so the problem will only become larger as people will still go to the underpriced product.

The good news is at least the politicians and regulators acknowledge they built a house of cards. What can they do to hopefully mitigate the potential financial catastrophe that is just around the corner with the next hurricane? First, go to State Farm and say, “How much rate increase do you need to stay in Florida?” This will prevent a terrible market disruption and keep Citizens from taking on even more potential exposure. One article indicates the Legislature is contemplating a 20% or 10% rate increase annually until the company and Cat fund has adequate capital. Those amounts are inadequate as there is bound to be a hurricane before Citizens and the Cat fund are adequately funded.

Let’s all pray the state of Florida continues to be fortunate in dodging hurricanes

14 thoughts on “The Chickens are Coming Home to Roost in the Sunshine State: A Sup guest post”

  1. The state should take over a bank so they can get TARP funds. Or employ a few accounting gimmicks to make their capital look bigger and their obligations look smaller. That is what a real insurance company would do. If the state is going to be a real insurer they can’t be squemish about cooking the books.

  2. Don’t cave in to State Farm. They will cherry pick the expensive new homes, leave the higher risks to the state, then not pay claims so the federal government will have to subsidize their policyholders with cash assistance, loans, and tax credits and deductions. That is how State Farm works.

  3. Agree with Brian’s comment about State Farm.

    Maybe tie the lucrative car insurance policy to the homeowner’s policies.

  4. Brian, with all due respect I disagree with your post. Cherry picking does not matter in the case of a major hurricane. Every company has selection standards and state run companies or pools are supposed to be the markets of last resort.

    The state should be enthusiastic over any carrier taking on larger exposures. Keeping SF will prevent all these less financially solvent from taking on exposures they will not be able to pay claims. No matter ones opinion of SF, they have the resources to pay claims and that is what the citizens of Florida need.

  5. To some degree you have both the State and the Insurance companies playing chicken: but both of them from a very weak hand. There is not enough money being taken in the the protective structure (if you could call it that) is not well thought out even for the amount that is taken in.

    North Carolina has some of the same problems but the issue has not become as acrimonious so both sides are willing to be a little quieter in their discussions.

    SF has more resources than some, but that also means they have more potential loses outside the market. It is not a free lunch.

  6. I think we’re mixing apples and oranges in Florida Citizen’s, the Cat Fund and State Farm. Citizens and Cat Fund exists to serve Floridians exclusively while the other exists to make a profit. The Cat Fund is State sponsored reinsurance while Citizens does the underwriting.

    The problem is the credit squeeze has squeezed the Cat Fund of credit/borrowing capacity like so many other entities. Citizens is too big for it’s own good as the risk is too concentrated for it’s premium base.

    State Farm OTOH wanted a 47% plus rate up on top of massive rateups a few years back. They’ve done every thing they can to inhibit smaller underwriters while simultanious dumping all their risk exposure on an overexposed Citizens. Hardly the model of a good corporate citizen.

    Back to that Cat fund didn’t State Farm pass on the cheap state backed RE? I bet Merna Re is the reason. We’ve found that it was the prototypical Bermudan based SPE that loaded up on supposed high grade/high yield bonds that we now call toxic paper. We only found where $1.3BN of the $4BN was placed and they stuffed those sales channels out to Cat Bond newbies who are now known as bagholders.

    This is what I’d like Russell and Sup to answer. How much do you think the net cost was to State Farm for that reinsurance? Given the yields paid out on the bonds against the now toxic paper in the trust I’m seeng scenerios where the “coverage” was essentially free.

    Maybe that rate up is because Ed Rust and the boys in Bloomington saw their house of cards was folding up and they were looking for their own kinda bailout on the sly. Perhaps that is why the administrative law judge in Florida called the Farm’s reinsurance trasnactiosn with itself a sham that included raiding their Florida unit for over $500MM.

    If I were the Feds I’d want to know if State Farm were solvent and with the collapse of the subprime usuary scam I frankly have some doubts.


  7. The premiums are not the problem. Capital reserves are the problem.
    Florida homeowners are paying more than enough to cover their expected losses and their hurricane risks have not changed.
    The problem is having the capital to pay on a 100-year or 200-year or 300-year event. You don’t collect that much in premiums from a concentrated area over the short term. If you expect homeowners to pay enough premiums every 10 years to cover their 100-year losses, they would be better off without insurance at all.
    Insurance companies need to manage risk rather than avoiding risk or admit that they can’t account for the capital to handle major hurricanes, floods, earthquakes, or other high severity events.
    This is something that only the federal government can do but we need to do it through a risk-based and accountable insurance program instead of the current system of after the fact disaster assistance, loans, grants, and tax subsidies.

  8. Sop. there is no way I can address your question. The way SF manages their capital requirements probably has more weaves and turns that I am able to keep up with. The fact they are a mutual company makes transpsarecy even more difficult.

    As I indicated previously, regardless of how feels about SF, having them in the state insuring 1.2 million homes is better than to have them leave.

  9. The CAT bonds probably looked pretty cheap at the time. But to make the returns work some additional flow of money most likely did need to pledged. So I doubt they were entirely free.

    Of course with those bonds in default, and the underlying being sub-investment grade to begin with, it looks like the CAT bonds are likely to wind up a lose-lose proposition for everyone. The latter bonds that are reliant on Goldman-Sachs, rather than the defunct Lehman, are likely to be in better shape. But the likely cost to State Farm was the pledge of more income stream support before GS would do the deal.

    A CAT bond is to some extent the opportunity to invest in an insurers float. Just like buying the Mortgage Backed Securities (MBS) was supposed to be the opportunity to invest in the Banks mortgage income stream.

    But with the float looking pretty thin, any type of insurance or re-insurance that does not have additional cash flows (premiums) is not likely to seem very attractive.

  10. Several weeks ago Sop suggested we stock up on popcorn as we watch the State Farm situation unfold in FL.

    The above article relates how some legislators are working to somehow keep SF from leaving. It seems Governor Crist miscalculated all thoses SF customers would find a much better deal. In reality, they found coverage, but at levels two or three times what they were paying SF. So the 47% rate increase was still a better vlaue for those citizens.

    This is not over and there will be many twists and turns, but it does appear some sanity might be prevailing now.

  11. Another day, another $5 billion found:

    Better lending market could help Florida’s Cat Fund

    “With the start of hurricane season a month and a half away, state officials learned Tuesday that the projected shortfall in money available for Florida’s hurricane catastrophe fund is about $5 billion less than projected.

    “The reason: A stronger credit market could allow the fund to sell bonds of up to $8 billion, not $3 billion, as previously projected.”

  12. Every little bit helps. As the article states, the citizens of the state of FL are still on the hook as the bonds have to be honored.

    Are we still rearranging the deck chairs on a sinking ship?

    The only hope for succes with this is “no hurricanes”.

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