The hurricanes battering Florida could crimp demand for municipal bonds byproperty and casualty insurers in the state that are already facing large losses as aresult of Frances and Charley, according to market sources.
As the damage wrought by Frances - which moved across Florida's peninsula over theweekend - gets tallied, it appears the storm may have been less costly than some hadanticipated. Frances only measured as a Category 2 hurricane out of a possible 5 on theSaffir-Simpson Hurricane Scale.
Initial estimates released on Monday by Risk Management Solutions, a provider ofcatastrophe risk management services to the insurance industry, suggest losses from thestorm may only cost insurers between $3 billion and $6 billion.
But combined with the impact of hurricane Charley last month - a Category 4 hurricane -the Newark, Calif.-based firm believes the two storms could end up costing insurersbetween $9 billion and $14 billion. That compares to estimated losses of $15.5 billionsuffered by property and casualty insurers when Hurricane Andrew hit southern Florida in1992, making it the costliest hurricane in U.S. history, according to the InsuranceInformation Institute.
Now, some are already fearing that another hurricane, Ivan, which was gaining strengthas it moved west across the Caribbean Sea yesterday, could threaten Florida yet again.The National Weather Service reported Ivan to be a Category 3 hurricane with sustainedwinds as high as 120 miles per hour yesterday afternoon and projected the storm to reachCategory 4 status. The Saffir-Simpson scale measures potential property damage andflooding expected along the coasts where hurricanes make landfall.
While the storm is expected to shift north, it remains unclear just how far north andwith what intensity, making its impact on Florida uncertain.
But peak hurricane season has at least two more months to run, leaving the state'sprivate insurers exposed to further losses, according to a report released by Standard &Poor's Friday.
There is building concern in the market that the hurricanes could curtail the appetitefor tax-exempt income at some insurers, Peter DeGroot, a municipal bond strategist atLehman Brothers, wrote in a report released Friday.
The impact of the hurricanes on the insurers will be mitigated by the fact that premiumsand deductibles have risen since Andrew and insurers have increased their use ofreinsurers and now have greater access to state and federal aid, DeGroot said in aninterview yesterday.
But were the losses severe enough, not only would demand for municipal bonds fromFlorida-based insurers be reduced, but the insurers could become sellers of muni bonds,according to a portfolio manager for one property and casualty insurer in the state.
With $208.7 billion in municipal bonds, according to the Federal Reserve Board, propertyand casualty insurers tend to be some of the largest buyers in the market.
But their appetite for municipal bonds is often determined by their level ofprofitability. When less profitable, the earnings generated by the muni bonds they ownbecome more likely to become subject to the corporate alternative minimum tax, reducingtheir incentive to accept the lower absolute yields muni bonds often carry.Some Florida-based insurers looking to liquidate assets in order to pay claims couldtherefore opt to sell municipal bonds because they may no longer provide any taxadvantages, the portfolio manager for the Florida insurer said. Plus, it would be anopportunity for them to sell and lock in gains because municipal bond yields have fallenrelative to Treasuries since May.
"The larger and larger and larger the loss, the less incentive and more impact on themarket you would get from insurers," the portfolio manager said. That could impactdemand for maturities in the 13- to 25-year range, particularly in the state of Florida,he added. Insurers typically try to buy bonds issued in the states where they are basedin order to curry favor with regulators and state officials.
The state-run Citizens Property Insurance Corp. is the largest insurer of hurricane riskin Florida, which is already expected to pay out close to $1.3 billion for damagescaused by Charley.
Many private insurers doing business in the state are either small companies with highlyconcentrated local exposure, or Florida subsidiaries created to protect some largernational insurance companies from the devastating losses many suffered from Andrew in1992. Not all national insurers operating in the state are structured as subsidiaries.
State Farm Florida Insurance Co. is the largest provider of homeowner insurance in thestate, followed by Allstate Floridian Insurance Co. with Nationwide Insurance Company ofFlorida in third, according to the Insurance Information Institute.
But it still could be too early to tell how large an effect the hurricanes might have oninsurers' demand.
"It's hard for us to say that Charley would have an appreciable impact on our buyingstrategy, and Frances is still such a big unknown," a spokesman at Allstate said onFriday. He could not be reached for comment late yesterday.
But Charley inflicted a loss of $425 million on the firm, he said. That compares tototal catastrophe losses of $1.5 billion for all of 2003, which left the firm with a netincome of $2.7 billion due to underwriting gains.
Estimated losses incurred by State Farm as a result of Charley totaled $1.3 billion,according to Mia Jazo-Harris, a spokeswoman for the firm. It remains too early to tellhow large losses caused by Frances will be, she added.
The firm would not comment on whether the hurricanes would cause it to sell municipalbonds, Jazo-Harris said.
At the end of March, State Farm Florida had $618.11 million in municipal bonds, makingup 43.4% of its portfolio, according to Thomson Financial. The Florida insurancesubsidiaries of Allstate and Nationwide held $62.12 and $98.54 million in municipalbonds, comprising 97.5% and 21.1% of the two firm's portfolios, respectively.
Property and casualty insurers can be "relatively significant" buyers of municipalbonds, constituting 10% to 15% of the demand in the market, said Ben Watkins, directorof the Florida Division of Bond Finance, on Friday.
However, any cheapening of Florida bonds would likely be limited by demand fromarbitrage accounts and other national investors looking for such opportunities,according to market sources.
Florida may not have to test the slackening demand for municipal bonds from insurerswith a large-scale flood of issuance related to the hurricanes.
Hurricanes do not typically wreak heavy damage upon the infrastructure of cities,counties and school districts, thus generating heavy borrowing needs for repairs,Watkins said.
Based on cash available and damage estimates, the Florida Hurricane Catastrophe Fund -set up in the wake of insurance company insolvencies caused by Andrew to reimburseinsurers for a portion of their losses - will most likely be able to fulfill itsreinsurance obligations for claims related to Frances without issuing bonds.
The Cat fund, as it is known, which has $9 billion in tax-exempt bonding authority,provides reimbursements of up to $15 billion for premium-paying insurance companiesafter hurricane-related property insurance losses reach $4.5 billion. The same amount inlosses must be paid after each hurricane before the fund can be tapped.
The fund had about $6 billion in cash when Hurricane Charley hit, from which only about$1 billion in claims from insurers were expected, Jack Nicholson, senior officer of thefund, said late last week.
Citizens also will be able to handle the damage with resources on hand without having toissue bonds, according to the Standard & Poor's report.
Tom Gallagher, the state's chief financial officer, responsible for overseeing the CatFund and state insurance regulatory office, said losses from Frances were not as largeas expected, adding that the state should be able to withstand a third hurricane strike.
Shelly Sigo contributed to this story.
