S&P highlights Florida’s $10.4 bn safety net amid Hurricane Milton aftermath

S&P Global Ratings, a provider of credit ratings and financial analytics, is closely monitoring the situation surrounding Hurricane Milton.

The organisation believes that Florida has effectively strengthened its reserves and liquidity in preparation for extreme weather events.

Additionally, the advanced planning by state officials suggests that collaboration among state agencies and local governments will be essential for a successful recovery.

Florida has established mechanisms to stabilise its property insurance market, which is inherently vulnerable to natural disasters.

Statutorily created entities within the state can levy assessments to enhance liquidity when needed. However, the increasing frequency of high-cost events may place pressure on insurance premiums, leading to potential affordability issues over time.

Florida has demonstrated fiscal resilience against significant weather events and has a solid history of building reserves to prepare for such occurrences.

Key components of this stability include the Florida Hurricane Catastrophe Fund (FHCF) and Citizens Property Insurance Corp., which acts as the insurer of last resort.

In response to rising insurance premiums, increasing insolvencies among insurers, and a surge in policy counts, Florida has enacted legislation aimed at alleviating pressures on the insurance sector.

These measures include reducing excessive litigation and providing additional resources for insurers seeking reinsurance.

The impact of Hurricanes Helene and Milton will test the effectiveness of these initiatives in improving property insurance affordability and attracting new entrants to the market, especially following major events. Since the reforms in 2023, nine new property insurers have been approved by the Florida Office of Insurance Regulation.

While the state has implemented risk-mitigation strategies, climate-related threats—such as more frequent or severe storms, flooding from storm surges, and rising sea levels—could negatively impact economic activity and demographic trends, thereby affecting state revenue.

The long-term exposure to these risks, coupled with Florida’s proven resilience and adaptation efforts, is expected to support the state’s credit quality, at least for now.

S&P Global Ratings also takes into account the risks associated with potentially severe or frequent events, which may lead to significant debt obligations partially funded by varying assessments after hurricanes. These entities could face substantial borrowing needs, with limited capacity following major catastrophic events requiring post-event financing.

The FHCF aims to provide reliable reimbursement for residential property insurers and can access capital markets for post-event bonding as needed.

It has issued revenue bonds as pre-event financing, allowing the FHCF to reserve funds in a trust account for liquidity in the aftermath of covered storm events.

For the 2024 hurricane season, the FHCF reported approximately $10.4 billion in available liquid resources for claims.

The cap on losses for the FHCF, set at $17 billion and estimated to cover storms with a one-in-250-year probability, reduces the likelihood of substantial additional bonding in the near future.

Historically, the FHCF has reimbursed insurers for losses from over a dozen storms across seven hurricane seasons, with the highest reimbursement of $7.5 billion for Hurricane Irma in 2017.

Established in 1970, the Florida Insurance Guaranty Association (FIGA) is a nonprofit organisation responsible for paying covered claims from insolvent insurers.

Its funding sources include estate distributions from insolvent insurers, recoveries from the FHCF, assessments, and investment income.

All insurers in Florida are required to join FIGA, which enhances its assessment collection ability. The Florida Department of Financial Services oversees FIGA, with the Office of Insurance Regulation levying assessments.

FIGA can impose an emergency assessment of up to 4% to fund hurricane-related claims and service bond debt, while regular assessments of up to 2% are available for operations and claims. Since 2006, FIGA has not needed to impose an emergency assessment. Any authorisation for an emergency assessment must be approved by the Office of Insurance Regulation.

Citizens Property Insurance Corp., created in 2002 through the merger of two entities, insures property owners who cannot obtain coverage in the voluntary market.

At its inception, Citizens established accounts to ensure bondholder security, though recent legislation has consolidated these accounts as of July 1, 2024.

Citizens has reduced its policy count to 1.26 million as of September 30, 2024, down from a peak of 1.4 million. Before the hurricane season, Citizens projected it would not need to levy an assessment for a one-in-50-year storm, but anticipated shortfalls of approximately $542 million and $12.2 billion for one-in-100-year and one-in-250-year events, respectively.

However, at this stage, it’s important to note that it is still too early to fully gauge the impact Hurricane Milton will have on the FHCF or the citizens of Florida.

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