Recovery Phase

Recovery Phase

We are recovering from the two hurricanes and the Fed’s easing action of fifty basis points. Regarding the former, there is much work to be done while acknowledging there are still people who are unaccounted for at present. On the Fed aspects we are now dealing with a ten-year Treasury that has remained stubbornly at over 4.0%. This clearly has not delayed any transactions, but we must question where the direction of rates is headed. There may also be a bit of uncertainty penalty embedded in the rate given the uncertainty over the election outcome.

The two recent hurricanes call into question the disaster preparedness of the states that have been affected in the near term. In the longer term, what is the best most cost-effective approach to mitigating the effects of climate change?

Clearly, evacuating people from the affected zones is the best approach to the preservation of life. Hunkering down in place is effectively a gamble. Many people had to be evacuated after the fact. Besides the basic humanitarian aspects, the overtime for public safety personnel may become quite burdensome.

Hurricane Helena featured more flooding damage and Hurricane Milton featured more wind damage but both events had elements of both.

The first question that needs to be asked is whether building should be permitted in flood zones or in areas where natural hazards are likely to have a greater incidence of adverse events. The Army Corps of Engineers is frequently consulted on these topics especially when it comes to riparian rights. The problem is the Army Corps recommendations often go unheeded. Zoning and flood insurance eligibility need to be more carefully considered.

The challenge with these recent events concerning the pace of recovery is influenced greatly by the general lack of property insurance on the residential side. Commercial properties and government facilities generally carry some kind of insurance coverage. As commercial insurance has become ever more expensive, many governments have resorted to self-insurance. When these events occur, we find out quickly whether self-insurance reserves are adequate. We also discover how much of the damage is likely to be covered before reinsurance is triggered.

Every entity and individual will be dependent on FEMA to an extent. How many resources that may be provided by FEMA are effectively capped. Congress is slotted to take up a bill to provide more funding to FEMA after the election. In the meantime, governments and others need to scramble for liquidity.

Many cities and counties have existing bank lines that they should be able to tap for liquidity in the near term. Governments also maintain some reserves or fund balances to cover sharp and sudden events. Providing public safety in the near term is paramount.

In the medium term, the damage that has been incurred will have an affect on property valuations. The adjustments may take at least a budget cycle or two before the adjustments become fully effective. Even in the best of circumstances, rebuilding would take 18 months to 2 years to complete and to positively affect valuations.

Florida has the advantage of having in place the state-run insurance program. Bond issues have been sold periodically to provide liquidity in the short term after an event. There has been more speculation this time that more small insurers are likely to fail and this outcome will increase the call on the state-run program. It is a bit too early to determine whether in fact this outcome is probable.

On the utility side, despite the number of power lines, transformers, and vaults that have been affected, reenergizing the lines is standard practice. The process is also aided by the many utilities that send personnel to the affected regions from other locales.

Water and sewer systems may take longer depending on the degree of damage to plants and to lines. Systems that are already subject to infiltration and inflow in normal conditions may take longer to restore. Plants that are flooded may just take a few days to bring back online if there is not extensive damage to machinery in place. Eliminating pathogens and other harmful bacteria also requires special methods that require elevated levels of chemical treatments.

Restoring the service will require some extraordinary funding. Governments seek to apply FEMA funds to the problems first and then will apply their own insurance funds and cash on hand. The timing of the progress on these matters is not fully predictable at the front end. Under these trying circumstances, liquidity is key. I would anticipate some patience on the part of the rating agencies. The discovery phase takes time. Officials are not always able to respond definitively in the early days after an event. I would anticipate that few ratings will change barring some catastrophic impacts from the events.

John Hallacy

John Hallacy Consulting LLC

10/16/24