Berkshire Hathaway To Buy Fla. Bonds After A Cat

If the Florida Hurricane Catastrophe Fund needs to float an emergency bond issue to pay for major storm losses, Berkshire Hathaway has agreed to buy up to $4 billion worth, a state official said.

Dennis MacKee, a spokesman for the State Board of Administration, said that through the deal “we are essentially trying to prepare ourselves for a difficult hurricane season.”

The SBA with input from a nine-member council directs the Florida Hurricane Catastrophe Fund.

Under the deal with the Omaha, Neb.-based firm, Florida will pay Berkshire Hathaway $224 million, which will be taken from the Cat Fund’s reserves, in exchange for a guarantee that the insurer will purchase as much as $4 billion in tax exempt 30-year bonds at 6.5 percent. The agreement also includes a requirement that the state’s losses exceed $25 billion before the bond obligation takes effect.

The Florida Hurricane Catastrophe Fund provides coverage for insurers at low rates, and funds those payments via bond offerings.

Spurring the need for a deal, Mr. MacKee said, was not a concern about the Cat Fund and its system, but about the market in which the bonds would be offered.

In the event of a major storm or difficult season, Mr. MacKee noted that Florida wouldn’t be the only state offering bonds to recoup losses, and he said the state wanted to ensure that the Cat Fund would be able to provide swift payments.

Without reaching the arrangement with Berkshire Hathaway, he said, “you really don’t know how quickly you could turn it around, get the funding and do the reimbursement.” The state could have purchased reinsurance for itself, he noted, but added “we saw it as a liquidity issue more than a transfer of risk issue.”

Mr. MacKee acknowledged that “there has been some debate” about the arrangement, given that the state is only paying to ensure that Berkshire will assume its obligation and that “it’s not cheap.” The odds of a $25 billion event, he added, are also “fairly narrow,” but the state opted for what it felt was the safer strategy in making the arrangement.

“The decision was to be prepared,” he said.

Energy Saving Seen Helping Push For Stronger Homes

The recent movement among consumers to pursue energy savings may dovetail with insurance industry initiatives to convince homeowners to properly prepare their dwellings for disasters, an expert in the field said.

Julie Rochman, president and chief executive officer of the Institute for Business and Home Safety (IBHS), said that many home improvements people are considering to save on energy costs will also help to protect against natural disasters.

She noted that properly mounted double-pane windows that seal air in and out to help with heating costs also help protect homes against high winds. The same is true for other improvements such as doors that close securely.

Ms. Rochman said, “There’s a good opportunity for us on the cost side to leverage conversations that are already happening with consumers.”

If consumers are told, “‘You should spend your dollars on X,’ and the green side of them is saying, ‘We should spend the dollars on Y,’ we can say, ‘You know what, you can kill two birds with one stone here. You can take that same dollar and not only save money on energy costs but also make your home more able to withstand natural disasters.’”

Ms. Rochman said research conducted by IBHS showed that consumers are more willing to spend dollars on improvements “if they think they’re getting two benefits rather than one.”

In general, for protecting a home against disasters, Ms. Rochman recommended that homeowners become familiar with the natural catastrophe risks in their areas and prepare adequately for them.

She said the IBHS has a Web site, www.disastersafety.org, that consumers can log onto to assess risks in their area. Ms. Rochman said homeowners enter their ZIP code at the Web site, and then they can see what perils impact their part of the world.

Speaking broadly about the nation’s response to disasters, Ms. Rochman said the United States remains “very reactive” and committed to “picking up the pieces and putting them back in the same places in the same way.”

She said, “Property rights in this country are very sacrosanct,” noting that people can essentially build what they want, where they want, and how they want.

Ms. Rochman added that while the U.S. does not spend a lot of time dealing with the issue of personal responsibility regarding where people build, the country does spend a lot of government and insurance dollars replacing lost property that is built and rebuilt in prime disaster zones.

Ms. Rochman attributed this mindset in part to what she called “weather amnesia,” where people quickly forget about catastrophes that have previously struck an area. “We know how to build better,” she said. “In many cases we just choose not to, and that’s a mistake.”

“Cost is a huge, huge issue,” she said, adding that areas such as Florida and South Carolina have tried to address this issue by offering tax incentives to people who take steps to harden homes against disasters.

Speaking to the level of risks faced by the nation with respect to catastrophes, Ms. Rochman pointed to events over this past year.

She said she has been at IBHS for over six months. “When I got here, literally as I was first walking the halls of IBHS, Southern California was on fire.”

Moving into winter, she noted there had been record winter storms. “We’ve had early flooding, we’ve had tornadoes, we’ve had more flooding, and we’ve had earthquakes in weird places where we don’t normally have earthquakes. I’m waiting for pestilence, and for frogs to come raining down from the sky.”

House Panel Set To Move On Insurance Office Bill

The Capital Markets Subcommittee of the House Financial Services Committee has tentatively scheduled action for July 9 on legislation that would create an Office of Insurance Information within the Treasury Department.

The subcommittee is also weighing whether to process bills at the same time that would allow risk retention groups to sell property insurance and reestablish the National Association of Registered Agents and Brokers, according to several insurance industry lobbyists.

Congress is taking its July 4th recess this week, but will resume work Monday. Because this is a presidential election year, Congress is expected to take off the entire month of August, hold a brief session in September, and not resume work until after the November election.

It is unclear at this time whether the insurance legislation taken up by the subcommittee will then be taken up by the full committee, or go directly to the House floor.

Companion legislation in the Senate for any of the bills that could be taken up next week does not exist at this time.

The Insurance Information Act, or H.R. 5840, would establish an Insurance Information Office within the Treasury Department to provide needed expertise to the federal government on insurance issues and work with the U.S. Trade Representatives in dealing with other countries.

It was introduced in the House April 14 by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee. A substitute to the bill as an amendment is expected to be introduced.

The substitute is expected to clarify limits to the OII”s authority to preempt state regulation, as well as mandate that the National Association of Insurance Commissioners’ data and resources be used by OII staff.

The amendment is also expected to add a representative of the Federal Trade Commission to the advisory board that would be established to help the OII office do its work.

Officials of the National Association of Mutual Insurance Companies confirmed that the markup of the OII bill had been tentatively scheduled by the committee.

But NAMIC spokesperson Nancy Grover said her organization wants to see the final draft of the legislation before determining whether it can support it.

“We've been working with Chairman Kanjorski's office, and we appreciate the hard work by members of the subcommittee to address our concerns about the bill,” Ms. Grover said.

“Our remaining concerns include the collection of data—such as annual financial statements and market conduct information—and the preemptive authority of the office,” she added.

The Increasing Insurance Coverage Options for Consumers Act of 2008, H.R. 5792, would allow risk retention groups to offer property insurance. The groups are currently limited to liability coverage. It would also beef up corporate governance mandates for risk retention groups.

The National Association of Registered Agents and Brokers Reform Act of 2008, H.R. 5611, would establish producer licensing on a national basis. The bill provides for one-stop nonresident licensing by establishing NARAB as a private, nonprofit entity managed by a board composed of state insurance regulators and marketplace representatives.

The bill does not set NARAB membership standards—such as for personal qualifications, education, training and experience—leaving that to the NARAB board, which has to “consider” the highest standards in place in the states.

P-C Reserves Seen Strong With Some Deterioration

While property-casualty reserves remained strong in 2007, signs have pointed to some deterioration in the industry’s reserve position, according to a new Conning Research and Consulting Inc. study.

Their report, “Property-Casualty Loss Reserves: Thinner, But is the Tail Getting Fatter?” states that overall industry loss reserve adequacy remains positive, and even improved slightly, but it adds that “with a closer look at reserves aged more than 10 years, we see a need for additional strengthening in some lines of business, particularly in the reserves carried for those older years.”

For core reserves in the most recent 10 accident years, the study reports that reserves “appear redundant by about 8 percent in 2007,” which is up from 6.4 percent in 2006.

While lines such as commercial auto, medical malpractice and personal lines showed “strong evidence for redundancy,” according to the study, deterioration of reserves emerged in workers’ compensation and commercial peril.

Much of the redundancy, says the study, is found in accident years from 2004-2007 despite “considerable releases in reserves over the past two years, primarily from these most recent accident years.” The strong redundancy could be connected to strong pricing dating back to 2003, according to the study.

But the study says that emergence of adverse development for accident years more than 10 years old, called the “tail,” is “persistent.” The study states, “The weight of loss reserves in older years is definitely increasing as a percentage of the total.”

Accident years five years and older, adds the study, made up more than 27 percent of all reserves in 2007, compared to 24 percent in 2002-2004.

In general, the study notes that rate increases and economic conditions have provided the necessary funds for reserve strengthening in recent years. “Over the past five years, premiums have grown significantly faster than losses in most lines of business,” Conning found.

For the last two years, though, the report points out that premium growth has slowed. But over this same period the growth in paid losses has also slowed, due in part to decreases in frequency and possibly increases in deductibles and other loss retention programs.

“As a result,” notes the study, “the loss reserve position has remained strong, and even improved in some lines of business from our previous review.”

The report explains that insurers are usually able to strengthen loss reserves during profitable parts of the underwriting cycle. When pricing erodes, it observes, reserve releases are used to support earnings for a time.

“The industry has been releasing reserves and may have the opportunity to release some more,” the study says. “However, with adverse development in older years and softening pricing and decreasing redundancy in recent years, this part of the cycle may be coming to an end.”

Moody’s Downgrades Two Mortgage Carriers

Moody’s Investors Service has downgraded mortgage insurers Triad Guaranty Insurance Corp. and Republic Mortgage Insurance Company, concluding that the financial strength of both is questionable.

The rating service late Friday reduced the insurance financial strength of Triad to “B1” from “Baa3” and downgraded Republic to “A1” from “Aa3.”

Moody’s said Triad is entering into runoff as of July 15 after Freddie Mac suspended the carrier from writing business as an approved mortgage insurer.

The insurer’s “insured portfolio has deteriorated meaningfully,” Moody’s said, and its capital ratio “is currently in breach of regulatory limits.”

Its negative rating outlook “reflects the potential for further adverse developments,” the rating service added.

Moody’s said its action on Republic reflected the company’s deterioration in capital adequacy and medium-term profitability prospects.

While demand for new business has improved, the rating service said of Republic that it is concerned with the exposures that originated prior to 2008 that have “eroded capitalization, and those exposures remain vulnerable to further economic deterioration.” The outlook on the company is negative.

While it is concerned with the deterioration in the insured portfolio, the insurer’s “risk to capital ratio is currently well within regulatory limits.” It also said its parent company, Old Republic International Corp., “has both the ability and the willingness to increase RMIC’s capital resources to levels consistent with single-A metrics in the near term.

Mortgage and guaranty insurers have been rocked by the subprime mortgage crisis that has produced deep losses for the insurers who insured the loans. Many of the larger affected insurers such as Ambac and MBIA have countered downgrade actions by saying they have the capital capacity to withstand the losses.