Amid the anxiety over the approach of Hurricane Matthew in September, property insurance companies and property owners could take comfort in the dependability and financial health of the Florida Hurricane Catastrophe Fund.
The allocation of its $13.8 billion operating assets, all invested in cash equivalents and other liquid securities, provided assurance that money would be available to meet claims for hurricane damage, if needed.
But last year Charles E. Cobb, a member of the investment advisory council of the Florida State Board of Administration, which oversees the fund and internally manages its assets, challenged the hurricane fund's conservative allocation and low return. At an IAC meeting, Mr. Cobb suggested making a recommendation to the FSBA trustees “to slightly change the allocation to get a better return in the future than the low returns we've gotten in the last 10 years.”
“It was a reasonable question,” Mr. Cobb said in an interview in October. “I was sort of making a comparison” with the pension fund returns.
The fund returned 0.42%, underperforming its 0.53% benchmark return for the eight months; 0.33% compared to 0.27% for three years; and 1.16% compared to 1.14% for the 10 years.
By contrast, the Florida Retirement System defined benefit fund, which the FSBA also oversees, returned 5.61% compared to its 5.65% benchmark return for the eight months; 7.4% compared to 6.62% for the three years; and 5.95% compared to 5.3% for the 10 years. All return periods are ended Aug. 31 and returns of multiple years are annualized.
Mr. Cobb deserves credit for challenging the status quo. No allocation or investment should go unchallenged. His question helped bring focus to the different objectives and investment horizons of the two types of funds.
The response from Ashbel C. Williams Jr., FSBA executive director and chief investment officer, “was totally satisfying to me” on keeping the hurricane fund allocation liquid, based on the objectives of the hurricane fund, Mr. Cobb said in the interview.
The main objective of that fund is capital preservation to provide timely reimbursement to insurance companies.
Mr. Williams, at another meeting, said each hurricane season has the potential to call on all of the hurricane fund's assets.
“We can try to limit pension liabilities by taking greater risk with assets” because of their long horizon, Mr. Cobb said. “But you can't take that risk with the hurricane money because it might be needed” on short notice.
As it turned out, Hurricane Matthew stayed offshore but caused some damage. John Kuczwanski, FSBA communications manager, said, adding the FSBA expects claims on the fund from the hurricane damage to be “minimal,” less than $50 million.