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FLA. STORMS SOW BIG FISCAL MESS

BY STEVE McLINDEN

Florida’s property owners have by now cleared most of the debris from the four hurricanes in a row that slammed the state last year. But there yet remains a financial mess for the shopping centers and retailers to sort through.

Having already lost weeks’ worth of sales to the fury of the storms, these retailers are also bracing for higher insurance premiums and more-stringent construction protocols this year — not to mention another potentially active hurricane season this summer.

Some Florida shopping center owners and retailers situated along the more vulnerable coastal areas are expecting rate rises of between 25 and 50 percent, and possibly more, on property-casualty insurance this spring, says Florida retail consultant Britt Beemer, founder of Charleston, S.C.-based America’s Research Group. “While insurers are being pushed by the state legislature to not raise rates on the home-owner side,” Beemer said, “commercial customers probably aren’t going to be so lucky.”

Early renewals in hurricane-affected areas have been as high as 65 percent, he says.

The hurricanes cost property owners about $1.2 billion in insurance deductibles, and insurers an estimated $23 billion in losses, according to state officials. Moreover, some of the sales losses can never be recouped. “Many retailers suffered loss of power for three to four weeks, and particularly for those that required refrigeration, such as grocers, it was pure loss,” said Richard McAllister, president and CEO of the Florida Retail Federation (story, Landlords learn it pays to check insurance policy small print).

Because the storms were considered separate incidents, “a lot of the larger [retail] companies on aggregate didn’t meet their deductibles, but still sustained big cumulative losses,” McAllister said.

All four hurricanes ranked among the nine costliest catastrophe payouts in U.S. history. Charley was fourth, at $6.75 billion; Ivan ranked sixth, at $6 billion; Frances was seventh, at $4.4 billion; and Jeanne was ninth, at $3.24 billion, according to the New York City-based Insurance Information Institute.

Added together, the storms “were more costly in today’s dollars than Hurricane Andrew was in 1992,” said Loretta Worters, an institute vice president. “But imagine if we were bombarded with four consecutive storms the size of Andrew. Insurers have to confront the very real possibility that a series of violent hurricanes will strike again this year.”

William Gray, a storm researcher at Colorado State University, predicts that this season will be more active than usual, though not quite at last year’s levels. There could be 11 tropical storms and hurricanes this year, he says, only four fewer than last year. Other forecasters have made similar projections.

Same-storm sales
For many retailers, the hurricanes’ impact on sales was far greater than any actual property destruction. Federated Department Stores says Frances alone cost its Florida units some $20 million in sales. Federated and a host of others blame the storms for some noteworthy third-quarter earnings shortfalls. The retailers affected include Chico’s, HomeGoods, Marshalls, T.J. Maxx and Wal-Mart.

Dollar General suffered a disproportionate beating when more than a dozen of its stores in Florida and Alabama were destroyed or badly damaged. The Nashville, Tenn.-based chain took a $2.1 million third-quarter charge related to the hurricanes.

But the storms did give a few retailers a boost. Lowes and The Home Depot managed to beef up third-quarter sales selling disaster supplies. Home Depot brought in some 7,000 tractor-trailer loads of products to resupply stores in hurricane-affected areas, the largest such distribution in its history.

The areas sustaining the most damage were southwest Florida’s Charlotte County, the panhandle’s Pensacola area and St. Lucie County, on the central Atlantic coast. “It was very geographic-specific in 2004,” said McAllister. “We had retailers with 16 to 17 locations who could not open them, and others who were hardly affected.”

Simon Property Group’s 25 Florida shopping centers were closed for a cumulative 142 days following the hurricanes. Two of the firm’s larger Florida properties, University Mall and Cordova Mall, both in Pensacola, endured flooding, power loss, downed parking-lot lights and uprooted trees.

After insurance claims were settled, Simon recorded a net loss of $2.3 million for the quarter, says company spokesman Les Morris. Disaster-response teams of Simon employees dispatched from around the country probably abated further losses, he says. In one bright spot, Simon’s planned $300 million, open-air St. John’s Town Center in Jacksonville escaped damage and is on track for a spring opening.

Other shopping center REITs fared better. Regency Centers, owner of numerous grocery-anchored and power centers in the state, reported overall losses of less than $200,000. Houston-based Weingarten Realty Investors sustained some minor wind damage to fences and trees at a handful of its 22 Florida centers. “We got off lucky,” said Weingarten spokeswoman Tracy Pursell.

Despite the historic storms, access to insurance will not be a problem for most Florida retailers and landlords as it was for some post Andrew, said Mary Pipino, president of Gallagher Pipino, a Youngstown, Ohio-based insurance broker.

However, some deductibles may rise, but probably not significantly, if the store or shopping-center portfolio of the insured is well balanced with less-vulnerable locations.

Though Weingarten has yet to see its Florida insurance renewal rates, “discussions we’ve had to date indicate [our rates] won’t rise significantly,” Pursell said.

Mom-and-pop shops and smaller independents probably suffered the worst because they lack the economies of scale to absorb the deductibles, consultants and retailers say. Deep Six Watersports, for example, a local chain of three scuba-instruction and retail stores, sustained severe structural damage to its Vero Beach store, while its locations in Jensen Beach and Stuart Beach were hit too. “We lost a whole month of sales [at Vero Beach],” said Christopher Hammett, manager of the Vero Beach store. Damages and lost sales cost the chain “several hundred-thousand dollars,” he added. As of early last month the Vero store still needed thousands of dollars worth of work to get up to speed, he says.

Jacksonville-based St. Joe’s, considered the largest private landowner in Florida, sustained only minimal damage at its various resort and retail properties, a stroke of fortune it attributes in part to a company policy of exceeding post-Andrew construction standards. Winds of up to 100 miles an hour hit St. Joe’s three-year-old Watercolor resort, a mixed-use property in Seagrove Beach, but apart from some now-repaired beach erosion, “we only lost a screen door and two pieces of gingerbread on a porch,” said Jerry Ray, a senior vice president. “Most developers build on the first dune off the beach. Our practice is to use that as a seawall and build behind it.”

Insuring to code
Consultant Beemer says Florida retailers should anticipate another “major adjustment” in construction standards in the near future. “It may change county by county, so some may have to rethink [site] decisions,” Beemer said. “It’s almost like you’re sinking in quicksand and you don’t know where to grab the rope.”

The price of insurance in Florida is now directly related to risk, which wasn’t the case in 1992 at the time of the devastating Hurricane Andrew, notes Worters. Insurers “will be looking at what the deductibles are and what building codes are in place. Obviously if you’re a huge hotel on a beach in a high-risk area, you’re going to pay more.”

Because insurance companies boosted their rates after Andrew — and incurred minimal losses up until 2004 — only one insurer will become insolvent from these storms, compared with 11 after Andrew, Worters says. Florida’s unique hurricane catastrophe fund known as CAT — short for catastrophe — designed to protect insurers from extreme losses, aided in the recovery. It was used to cover about 10 percent of the damages.

Even so, last year’s storms managed to blow through more than 80 percent of the reserves insurers had set aside for hurricane claims, which some observers say could put the industry in a tenuous position this summer. Furthermore, one long-held risk assumption — that inland Florida counties are less susceptible to serious property damage — was proved wrong in 2004, and insurers are likely to adjust rates accordingly throughout the state, insurance associations say.

Allstate, Citizens Property and State Farm, which combined write more than half the insurance business in Florida, are all under pressure from investors and shareholders to minimize their exposure in the state, observers say.

One firm, Naples-based Insurance and Risk Management Services, is telling its retailer clients that property and casualty insurance costs will probably rise 15 to 25 percent this year, says William Kuhlman, an agent. “There will also be higher deductibles for wind and hail damage,” he said.

The one positive to emerge from the storm clouds, according to Beemer, may be the handful of redevelopment opportunities created by the pockets of homes that were destroyed on prime land. “But that’s about it,” Beemer said. “We’ll be feeling the effects of 2004 for a long time.”