Penny-wise and billion-pound-foolish in Florida
As the nation’s most important locus for travel, an industry that employs an estimated one million people statewide, one might expect that Floridians would have a thoughtful approach to the subject. The millions who fill the state’s convention halls for business conferences every year certainly don’t do so just to get some kicks in the sun, but because commerce sometimes requires real face-to-face human interaction.
But even if many Floridians understand all that implicitly, that doesn’t stop them – or, more especially, their local media – from going on the occasional apoplectic witch hunt when public or quasi-public figures take to the road to try to find solutions in the global marketplace for Florida’s daunting property insurance challenges.
First, it was state Insurance Commissioner Kevin McCarty, who was called out for extensive travel to reinsurance centers like Switzerland, Germany, London and Bermuda, as well to a number of international forums he attended in his capacity as president of the National Association of Insurance Commissioners. Even though just $4,455 of the travel expenses were paid by Florida taxpayers, McCarty’s office was forced to explain how engagement with the global insurance and reinsurance markets provides benefits many, many times that figure to a state that has struggled mightily to attract sufficient insurance capital.
More recently, it’s the leadership of the state-run Citizens Property Insurance Corp. that has been forced to justify its $3.4 million travel budget, which represents just 0.17% of its overall $2 billion operating budget. As reported recently by Sunshine State News:
Citizens Chairman Carlos Lacasa said he asked (CEO Barry) Gilway if the travel costs need to be revamped or improved upon, even though the costs are only “a fraction of a percentage point of the total administrative budget.”
Lacasa’s call comes after former interim president, Thomas Grady, submitted travel vouchers from March and April totaling $9,334 and included $941 for four nights with meals at the Grand Hyatt Tampa Bay and $114 for a limo ride from the Fort Myers airport to his home in Naples.
Citizens has also received questions about the costs associated with travel by a couple of executives to Bermuda and Europe to negotiate two $750 million bond placements that resulted in a combined $47 million savings for the company.
If the board wants to scrutinize a $100 limo ride by the former CEO, more power to them. That just shows they’re doing their job. But the investment Citizens made with its trips to secure the listing of its watershed $750 million Everglades Re cat bond in Bermuda – Citizens’ first foray into the cat bond market, and the largest single-peril offering in history – and its meetings in Bermuda and Europe to negotiate its complementary $750 million package of traditional reinsurance (on which Citizens estimated $29 million in savings at a time when most in the market are seeing rates harden) are already yielding dividends that go well-beyond the $47 million in savings estimated by the company.
What’s most important about these trips is that they resulted in Citizens placing a combined reinsurance package that was 50% larger than what had originally been planned. That’s a half-billion dollars of additional risk transfer; $500 million of risk that was taken off the backs of Florida taxpayers and placed in the global reinsurance market. As Bloomberg reported earlier this week in a piece on how the performance of cat bonds has been beating corporate debt:
“We absolutely did not know that we would have the opportunity to upsize this thing (the Everglades Re offering) three times,” Sharon Binnun, chief financial officer of the state’s largest property insurer, said in a telephone interview. “In the interest-rate environment that we’re in now, investors are looking for another vehicle through which to park at least a portion of their investment portfolios.”
The debt, effective for two years, priced to yield 17.75 percentage points more than a money-market fund of Treasuries in which the proceeds will be stored.
These are the kinds of transformative deals that both Citizens and the Florida Hurricane Catastrophe Fund will have to pull off a lot more of if there is any hope for these state-run agencies — beset with enormous moral hazard problems and the maximum in adverse selection — are to be able to secure risk transfer on better terms. They won’t solve Florida’s property insurance problems — decisive action by the Legislature and the Office of Insurance Regulation are needed to do that — but they are nonetheless tremendously important to safeguarding the solvency of these institutions and protecting taxpayers from the burden of post-event policy assessments.
For all that, springing for the occasional $400 hotel room seems a small price to pay.