Hurricane Season and Municipal Bonds

June 1st marks the beginning of hurricane season.  It’s been quiet for a few years but forecasters are predicting a more active 2010 season.  Here are a few thoughts for analyzing the links to municipal bonds.  Gray and Klotzbacher of Colorado State University operate the Tropical Meteorology Project believe that 2010 will be a “significantly more” active year, relative to historical averages. 

Information obtained through March 2010 indicates that the 2010 Atlantic hurricane season will have significantly more activity than the average 1950-2000 season. We estimate that 2010 will have about 8 hurricanes (average is 5.9), 15 named storms (average is 9.6), 75 named storm days (average is 49.1), 35 hurricane days (average is 24.5), 4 major (Category 3-4-5) hurricanes (average is 2.3) and 10 major hurricane days (average is 5.0). The probability of U.S. major hurricane landfall is estimated to be about 130 percent of the long-period average. We expect Atlantic basin Net Tropical Cyclone (NTC) activity in 2010 to be approximately 160 percent of the long-term average. We have increased our seasonal forecast from the mid-point of our early December forecast.

The Tropical Meteorology Project has a detailed the probability of landfall of major hurricanes for each of the counties from the tip of Texas, along the Gulf Coast and up the Atlantic coastline to Maine.  There are pockets of high probability and pockets where hurricanes rarely hit.  The data is downloadable into a spreadsheet — if you navigate to the “landfall probability table”.  The project’s website also has background on their methodology and the full analysis of their predictions for the inquiring mind.  From this you can develop a methodology for analyzing hurricane risk in coastal communities. 

Citizens Property Insurance Corporation, a state insurer in Florida, was set up to be a “last resort” coverage for wind damage when private insurance fell apart.  The CPIC has grown to become the major insurance provider in the state and is controversial among property-owners.  The St. Petersburg Times recently commented:

Citizens, the state’s largest insurer with about 1 million policyholders, and the state’s Hurricane Catastrophe Fund, which sells reinsurance to insurers, are in better financial shape than they have been entering some previous hurricane seasons. But they are far from being able to handle the worst hurricanes, and after a large storm Floridians would be paying huge assessments and begging for help from the federal government. There has to be a better way.

We agree.  Single-state catastrophe insurance makes little sense.   Concentration of risk is a classic red flag in credit analysis, and a this program is rife with concentration.  A “cat” insurance product would balance locations that draw on capital at times when other places have lower risk, producing on-going premium and steady capital.     Unfortunately, political boundaries and the lack of inter-state collaboration makes such a program difficult.  A multi-state program  (best would be international) would balance the risks of earthquake, hurricane, flood and tornado (not to mention man-made disasters).  The Insurance Company Institute has an excellent discussion of the issues and current proposals for covering mega-disasters.    
Many are linking the oil spill in the Gulf with the coming hurricane season.  See the New York Times article on this.  John Mousseau of Cumberland Advisors recently wrote a chilling commentary about potential problems along Gulf Coast communities from the oil spill. 
The long-range consequences of the spill and how a serious hurricane would interact are not clear.  While the spill in Valdez, Alaska and Hurricane Andrew in Homestead, Florida actually created a surge in economic activity, we are less optimistic this time around. 

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