Weekly Preliminary OS Climate Risk Review (4/29/21)

Florida municipal issuer boilerplate climate risk non-disclosure: the gift that keeps on giving. There’s the usual copy & paste disclosure, which talks about economic impacts on coastal issuers (even though Doral sits inland a ways), and that that climate change’s impact is something that will only have impact in the longer term and over several decades (wherein I think many would say its a little more contemporary than that). The only information this issuer provides regarding proactive climate adaptation efforts is one sentence stating that the “City has a stormwater master plan that is updated on a five (5) year cycle…to address the impacts of climate change.” I guess we’ll check back in 5 years, thanks…

Till then, this week’s award for most irresponsible risQy issuer goes to:

City of Doral  ($88,700,000) General Obligation Bonds, Series 2021 (Parks and Recreation Projects)

The City of Doral should know better by now. Doral’s 10-year risQ outlook is gut wrenching to say the least — risQ Score of 4.7, Hurricane risQ Score of 4.0, ranking in the 99th and 97th percentiles for GDP impairment and property VaR, respectively. And while exposure to the catastrophic impacts of climate change, hurricanes, and flooding serves as the key driver of risQ in the City, it is in fact the City’s increasing vulnerability due to inadequate risk transfer mechanisms that could ultimately lead to a knockout blow.

Last week we provided a glimpse of California’s teetering insurance market, which is feeling the stress of increasing extreme wildfire events in recent years. Many insurers have refused to renew coverage in certain areas of California, and State regulators reported that insurers refused to renew 235,250 home insurance policies in 2019, a 31% increase from 2018. For homeowners that are unable to secure private insurance policies, the California FAIR Plan is the “insurer of last resort”. However, FAIR continues to raise rates as wildfire risk increases throughout the State, with rates increasing 15.6% statewide in the most recent year (source).

While it’s apparent that the insurance model in California is relatively unsustainable, the insurance model in Florida can best be characterized as a big loser. Carriers in the State had a combined net underwriting loss in 2020 of approximately $1.6 billion, according to industry data, with net income losses totaling nearly $840 million. The most recent annual loss for Florida carriers extends the streak of five consecutive years of net income and underwriting losses, due to a combination of recent catastrophic events and the increasing costs of reinsurance coverage (as well as excessive litigation expenses tied to insurance claims) (source). Premiums have increased steadily across the State leaving many homeowners holding a heavy bag of unaffordable insurance premiums. In 2020, Florida insurers requested 105 rate increases, the majority of which were for premium increases above 10% (source). 

Similar to California’s FAIR Plan, which we discussed last week, Florida’s Citizens Property Insurance Corporation is considered the State’s “insurer of last resort”. When private carriers in the State raise premiums unaffordably high or refuse to renew coverage altogether, Citizens is the go-to option. Unfortunately, the stress on Citizens has become increasingly unbearable in recent years. According to a study published by Florida State University researchers, Citizens total policy count increased 15.3% during just the first 9 month period of 2020. More policies -> more exposure -> greater losses: underwriting losses during the relatively innocuous year of 2020 totaled ~$98 million, with total losses over the past 5 years exceeding well over $1.7 billion.  According to a meeting earlier this year hosted by the Florida Senate Banking and Insurance Committee, Citizens annual underwriting losses and continued increases in exposure are leading to “unsustainable” growth and could “bust the State’s budget” (source). The FSU study also states that “reducing Citizens exposure in the long-term can be accomplished by expanding the availability of coverage by private market insurers.” Hm, but hasn’t that ship sailed and sunk already?

As is the case with California’s FAIR Plan, Citizens isn’t truly the insurer of last resort for homeowners in Florida. No, that role is played by the Federal Emergency Management Agency (FEMA). Historically, the U.S. Federal government has socialized the losses in Florida following catastrophic natural hazard events in two key ways. The first mechanism for protecting value in Florida — especially in the risQiest locations such as Doral —  is through the disaster relief funding provided by FEMA following catastrophic weather events. The second, more controversial disaster welfare program, is FEMA’s National Flood Insurance Program (NFIP). For years, the NFIP has effectively incentivized and subsidized development in high flood risQ areas, keeping premiums superficially low and mitigating any disruption to real estate markets within coastal cities. According to FEMA, NFIP claims paid to property owners in Florida since 1978 totaled 305,612, ranking just behind Louisiana (461,324) and Texas (382,953). The State also leads the highest claiming states in terms of rejected claims, with 36% of claims rejected over that same time period. Miami-Dade County — where the City of Doral is located — has been tapping into the taxpayer piggy bank more so than other U.S. counties. Between 2000-2019 Miami-Dade County filed approximately $295 million worth of flood claims which ranks in the 99th percentile for total claims among counties in the 48 contiguous states.

Some may argue that the NFIP is the most unsustainable of the 3 layers of risk transfer available to Florida homeowners. In fact, the NFIP isn’t just an unsustainable program, it’s effectively insolvent — Congress canceled $16B in NFIP debt in 2017 in order to allow FEMA to cover claims resulting from Hurricanes Harvey, Irma and Maria. Fortunately, there is an ongoing initiative to overhaul the risk quantification and premium pricing framework underlying the NFIP operation. NFIP’s Risk Rating 2.0 (“RR2.0”) initiative intends to build toward fixing the program by calibrating insurance premiums to actual flood risk. Unfortunately, political friction is playing a mitigative role in the roll out of this new and improved system (what else is new). Senate Majority Leader Chuck Shumer has continuously balked at the premise of RR2.0, recently claiming that the program’s impacts on property values would severely impact New York residents living on the coast, and calling for FEMA to “stop this plan” (source).


Ultimately, it’s safe to assume that the roll-out of Risk Rating 2.0 will take place eventually — and, once it does, the corrected underwriting framework will have a material impact on Florida’s real estate market. The market for residential and commercial real estate in southern Florida has seen tremendous growth in recent years. Miami-Dade County ranked in the 98th percentile for real estate growth during the period of 2012-2018 (according to the Zillow Home Value Index), and in 2017 Doral was named the fastest growing city in Florida (source).

Unsurprisingly however, the expenses resulting from Florida’s crippled insurance market is beginning to bleed into the State’s real estate market. The Wall Street Journal published a piece just last week providing anecdotal evidence of this phenomenon; a Miami area resident’s homeowner’s policy wasn’t renewed this past year, and the cheapest alternative was to enroll in a new policy that had an annual premium of $9,644, equating to an 85% increase.

Southern Florida is the epicenter of insurance market unsustainability and the resulting instability emerging in the real estate market. Assuming a static view of risk, there’s already rampant mispricing within both markets; however, the critical problem for Doral and other areas of the U.S. is that these risks aren’t going away, but rather becoming grossly worse under climate change. Doral is exposed to hurricane risk which is increasing in likelihood each year, and risQ’s climate-conditioned hurricane model provides a view of just how bleak the outlook is for the City.

In 2021, the annual probability of a Cat 1 or greater hurricane reaching Doral is 6.9% and by 2051 the annual probability is over 10% (assuming the RCP 4.5 greenhouse gas emissions trajectory, which is an intermediate scenario). Hurricanes are becoming more likely and that’s problematic for Doral where one of the most hard-hitting perils is precipitation-induced flooding brought by hurricane events. Large coastal flooding events also pose a major risk to Doral. risQ expects a 100-year coastal flood event will result in property value replacement costs of 69% and economic losses equivalent to 96% of the city’s annual GDP. Worsening the situation is the fact that not all the flood risk even lies in the FEMA floodplain models. Our analysis shows that just 71% of residential property that is at risk of flooding is within the FEMA Special Flood Hazard Area. The floodplains are designed to require those within those areas to procure insurance coverage; if there is flood risk that is outside the zone the inhabitants may be unaware, unprepared and uninsured if a disaster hits.

Anyone considering investing in the longer-dated bonds included in this series needs to seriously factor in 1) the expected likelihood of a catastrophic event happening before the bonds mature, and 2) the resulting impacts to the local economy and real estate market if a catastrophic event were to happen. 

The above table shows that while the probability of a Category 4 or greater hurricane reaching Doral by 2025 hovers just around 10%, that probability jumps to over 65% by 2050. A storm this size would result in 24% property VaR and 57% GDP impairment. The resulting losses shown are only for hurricane storm surge and wind damage, however another significant hazard that Doral faces is hurricane precipitation-induced flooding. In our models, hurricane precipitation flooding is independent of the category of hurricane because even a Cat 1 hurricane can cause substantial rainfall-based flooding. As such, any category of hurricane reaching Doral could result in rainfall that puts 18% of property VaR and impairs the equivalent of 88% of the City’s annual GDP (both losses ranking in the 99th percentile nationally amongst cities).

We often poke fun at non-disclosing issuers in these blog pieces. It’s our way of cathartically making light of what in reality is becoming a horrific issue for many risQy cities like Doral. We’re dismayed to find that Doral isn’t seriously confronting these emerging risks, let alone informing its investors. The year 2020 wasn’t a bad year for the State of Florida or Doral — the insurance market survived, the real estate market boomed, and population growth accelerated. Given all of the trends covered above, such as increased catastrophic weather events, crippled insurance industry, and growing costs of owning risQy Florida real estate, do we honestly believe that the City of Doral in 2040 will look anything like it does in 2020? (By the way, Doral is issuing over $45 million in debt maturing after 2040…).

All we can deduce from the Doral POS is that they’re planning on the next 3 decades unfolding business-as-usual. Drawing on some wisdom from former heavyweight champion Mike Tyson: everybody has a plan until they get punched in the mouth.

Honorable Mentions

The School Board of Palm Beach County, FL (risQ Score 4.6, Flood risQ Score 4.0, Hurricane risQ Score 3.7)

Pay attention on this one. Back in our commentary on April 8th we covered the Preliminary OS from Palm Beach County and it actually had a lot going for it from a climate disclosure and risk mitigation perspective. Given that this school board is coterminous with the county, how hard would have been to leverage all that great information? Too hard, apparently, given the cursory 7-8 lines of text focused on Climate Change and Natural Disasters that reeks of copy-paste from somewhere far less qualified and informed than the county itself could have easily provided.

Aside from that whiff, there are other worrying signs in the OS. On pages 84-85 there is detail that hurricane insurance is no longer affordable to maintain at the same levels as before and there are a bunch of exposed costs to such events that the school will have to cover from its own balance sheet. Just doing the math out to 2040, the latest maturity of this series, there is a 74% chance of at least one hurricane occurring in Palm Beach over that time, and the typical Property Value at Risk to the county overall from just the precipitation component is 21%. The school district’s odds of having a material financial event (or multiple variants thereof) due to climate are very high, and their insurance is not going to get any cheaper. In this regard at least, although in a veiled way, they’ve given you enough to put the pieces together and ask questions about the risks they’re willingly accepting and not talking sufficiently about.

Alief Independent School District, TX (risQ Score 3.3, Hurricane risQ Score 2.5)

Part of a band of high – but not off the charts – risk school districts in the inland periphery of Houston. The OS has a section focusing on Hurricane Harvey and that it did minimal damage to district facilities. Beyond that, the more forward-facing aspects of flood risk, future hurricane risk and climate change don’t get a mention. In terms of other health indicators, enrollment and attendance in the system has been dropping since 2017. This is attributed to competing charter schools, but in the Selected Financial Information on page viii of the preface pages, there is also a parallel population drop noted. There is a correlation between flood events and population change, especially in non-coastal issuers. Even if a school districts property is not damaged there are other fundamental health indicators for a district that get impacted when the broader local population suffers flooding in their own lives and property.

Atlantic County Improvement Authority – Stockton University Atlantic City Campus (risQ Score 3.6; Flood risQ Score 4.9)

Precariously positioned to say the least, and recognized implicitly as such in the Preliminary OS about the project. In the Insurance section on page 21, there is a specific policy for the campus as a result of being part of a PPP. The $136 million in aggregate coverage for just this campus is indicative of something. All that said, no other mention of flood risk, climate change, historical events – Sandy, anyone? – that might be important for $54 million in par value extending out to 2041. For context, the cumulative Property Value at Risk for the campus and the immediate surrounds is 131% out to 2041 and a one-time 100 year coastal flood has 61% property losses. We’re glad you have some property insurance and all, but that has its limits financially and most assuredly doesn’t help with the disruption, damage and recovery that the surrounding area would also have to endure to make this campus viable in the long run.

Florida Development Finance Corporation – The Glenridge on Palmer Ranch (risQ Score 3.6, Flood risQ Score 3.9)

That’s a tidy $89 million in par value for a CCRC issuance, in 5, 10, 15 and 30 year maturities, backloaded to the latter. We already know that this is one cohort with a propensity for financial impairment correlated with climate risk, and that’ll get worse with 30 years of climate change thrown on top. This CCRC is nicely positioned in the water-laden outskirts of the greater Sarasota area so inland flooding and hurricane precipitation are recurrent problems. You’ll find a total of 6-7 lines of text on “Natural Disasters” on page 34. For reference, this is 5-6 times the par value of the above Rhode Island strip of bonds with significantly higher climate risk, in a sector with notorious climate risk correlation to performance, but with a couple of orders of magnitude less discussion of climate risk. Beyond all that, in the feature OS commentary this week we gave you a flavor of where Florida insurance costs and property value might be heading. We hope you get paid well to take on this risk.

Mobile County, AL (risQ Score 3.5; Flood risQ Score 3.4)

On page 9, under “Hurricane and Other Severe Weather” the issuer at least makes you generically aware that there is plenty of risk they’re leaving to chance and just letting the cards fall where they may. Nothing beyond that in terms of “flood” or “climate change” which, for another coastal issuer strip of bonds with maturities out to 2041, isn’t good. In terms of evidence that there is actually flood awareness and mitigation, the indicators aren’t great. Mobile County is not part of the NFIP’s Community Rating Survey (CRS) so they’re not doing anything proactive that’s being recognized at the federal level. The City of Mobile once registered for the CRS but has done nothing since, and just Dauphin Island shows up as actually having some sort of recognized program (CRS rating of 7). That’s not to say there hasn’t been damage in the county. From 2000 to 2019, NFIP claims per capita per year were $16,500 (96th percentile among counties) and properties are now being bought out (98th percentile nationally). As one of the most populous, well-resourced but climate vulnerable counties in the state, Mobile should be doing much better in terms of disclosure. 

Rhode Island Health and Educational Building Corporation – Newport Issue (risQ Score 2.6; Flood risQ Score 4.3)

As we’ve noted before, Rhode Island issuers have their climate risk disclosure and action act together, and this OS is no different. Just read the 3-4 pages from A-4 to A-7 in Appendix A and appreciate the detail. Then, consider the overall risQ Score here compared to the other Preliminary OS’s highlighted herein and ask yourself what standards could and should be expected of others. That is all.

Lake Elsinore CFD No. 2006-1 – Summerly IA KK (risQ Score 3.6; Wildfire risQ Score 4.5)

We were actually in Lake Elsinore last week and did a deep dive on the Westlake CFD, but here we go again. The Natural Disasters section uses exactly the same language and its no less inaccurate and misleading in terms of the wildfire risk to this specific district. Easiest thing to do here is to point you towards last week’s in-depth commentary. Two can play this copy-paste game…you set’em up and we’ll knock’em down.

Eastern Municipal Water District CFD No. 2004-35 – Mountain Gate (risQ Score 2.0; Wildfire risQ Score 3.0)

This case is a little different as Mountain Gate is unlucky enough to be within an area designated by the California Public Utilities Commission as being within a “Tier 2 – Elevated Fire Threat Area”. To their credit, the issuer then provides some details as to why wildfires can be more problematic in the area on pages 24-25. They are also much more explicit in tying wildfires to the risk of “Reductions in Property Values” on page 29 than the above Summerly CFD that only talks in terms of the potential for uninsured losses and not the broader systemic threat to actual property value and the ad valorem tax base it carries. Just as we compared the Rhode Island issuer above to others showing where those with higher climate risk disclosed less, the same applies here where Mountain Gate has done more for less reason. The key negative we’ll note, even for Mountain Gate, is the lack of recognition or mention of climate change and the impact on wildfire risk over time. Again, as we discussed last week for Westlake – and as is now an intrinsic part of our wildfire model – climate change is only going to amplify the wildfire risk for California issuers over time. A 100 year wildfire is already at 23% property losses for Mountain Gate and a 500 year event carries 80% losses. Those numbers are only going in one direction and that should be worthy of note in any such disclosure document.

Housing Finance Authority of Miami Dade County, FL – Sunset Bay Apartments (risQ Score 4.9, Hurricane risQ Score 4.7)

This is where the further into the bowels of municipal bond issuers you get, the less you find any mention of climate risk in Official Statements, and this is a case in point. No mention of “climate change”, no mention of “hurricane, only one passing mention of “flood”. Housing for low income groups, as this project is focused on, should do more – not less – in terms of climate risk disclosure and discussion of any local efforts to mitigate that risk. For context, if you look at the impact of 2020 hurricanes on Louisiana, by far the most chronically displaced and disproportionately impacted were those with the least financial wherewithal to manage. Certainly, the project has its merits and is well targeted, given a localized 46% stressed renter metric (96th percentile nationally). There is a clear need for affordable housing in this neighborhood. However, we’re looking at Property Value at Risk overall, for hurricane storm surge and hurricane flooding metrics all in the 99th to 100th percentile here. Is putting low affluence population in harm’s way with no plan and no acknowledgment of risk the right thing to do? The climate risQ here is brutally high, even by Florida standards.

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