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Florida Hurricane Catastrophe Fund to weather another large loss after Michael

The strongest hurricane to hit the Florida Panhandle in recorded history may lead to significant losses for a range of public and private entities, including the state trust fund that reimburses residential property insurers for selected portions of their hurricane-related claims.

Hurricane Michael made landfall Oct. 10 near Mexico Beach, Fla., marking the second straight year in which a major hurricane made landfall in the Sunshine State, following Hurricane Irma in September 2017.

Advisers to Florida Hurricane Catastrophe Fund projected in an Oct. 9 report that the fund balance would total $13 billion as of Dec. 31, assuming no landfall-making storms, as compared with a pre-Irma estimate of $15 billion for the prior year. The fund absorbed an estimated $3.2 billion in Irma losses. Its total estimated claims-paying capacity, which includes a $1 billion risk-transfer placement and projected bonding capacity of $8 billion, declined to $22 billion from the year-ago, pre-Irma amount of $23.9 billion. Still, those amounts compare favorably to prior years. The fund balance increased steadily after bottoming following the active 2004 and 2005 hurricane seasons.

All insurers licensed to write residential property insurance in Florida are required by law to maintain cat fund coverage in excess of an aggregate retention with coverage amounts for the resulting layer to be selected in amounts of 45%, 75% or 90%. The vast majority of carriers chose coverage amounts of 45% or 90%, according to a June 30 compilation of their selections.

The top-five cat fund counterparties by premiums ceded in 2017 among private entities at the top-tier level, according to S&P Global Market Intelligence, were Universal Insurance Holdings Inc., the Tower Hill group, United Insurance Holdings Corp., FedNat Holding Co. and First Protective Insurance Co.,

The cat fund generally represents but one element of Florida property insurers' annual reinsurance towers, however, as carriers also rely on commercially available coverage provided through the traditional and alternative markets.

A review of a Florida Office of Insurance Regulation database found that 31 individual carriers maintained total exposure on personal and commercial residential property insurance policies with wind coverage in excess of $1 billion in the 11 Florida counties bordering the Gulf of Mexico that were under a hurricane warning as of mid-afternoon on Oct. 9. The total insured value for those types of policies came to an aggregate total of more than $112.89 billion. The data include state-run Citizens Property Insurance Corp., but excludes State Farm Florida Insurance Co. affiliate State Farm Mutual Automobile Insurance Co.

First Protective, which according to a Florida Office of Insurance Regulation database had the highest amount of combined dollar value of exposure on personal and commercial residential property policies with wind coverage in 11 Gulf-bordering counties from the Suwanee River west to the Alabama state line at $12.33 billion, maintained a reinsurance program in 2017 that provided coverage up to a probable maximum loss of $1.09 billion in excess of a $5 million retention. That amount is equivalent to an event with a return period of greater than 100 years but less than 125 years, the company said. It selected cat fund coverage at 90% of qualified losses for that year.

FedNat disclosed that its 2018-2019 reinsurance program included aggregate coverage of about $1.8 billion, with maximum single-event coverage of $1.3 billion, subject to a per-occurrence pretax retention of $23 million across FedNat Insurance Co. and Monarch National Insurance Co. The program includes cat fund participation at 75%. FedNat Insurance ranked second in the 11-county region with $10.21 billion of total exposure with wind coverage.

Universal Property & Casualty Insurance Co. which ranked No. 3 in the 11 counties based on $9.09 billion of total exposure with wind coverage, obtained coverage for 2018-2019 of up to a first-event loss of $3 billion. The company has a $35 million net retention and it selected cat fund coverage at 90%.

Other property insurers with total exposure on personal and commercial residential policies with wind coverage in excess of $4 billion, according to the Florida regulator's database, included United Services Automobile Association, Gulfstream Property & Casualty Insurance Co., Palm Beach Gardens, Fla.-based Olympus Insurance Co. and St. Johns Insurance Co. Inc. Gulfstream informed the Office of Insurance Regulation in a pending rate filing that its structure provides for $423 million of single-event coverage, which would be equivalent to a 1-in-188-year probable maximum loss. St. Johns said in a rate filing that its program offers coverage of up to $727 million, or a 113-year probable maximum loss.

For Olympus, the company said in a regulatory filing that it increased its rate of cessions under a quota-share treaty to 59% from 54% upon its June 1 renewal as part of a program designed to protect against "one or two truly historic loss occurrence events."

It is far too early to draw any conclusions, but that may prove to be an apt description for Michael.