NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following Florida Hurricane Catastrophe Fund (FHCF) Finance Corp bonds:
--$2 billion revenue bonds, series 2013A.
The bonds are scheduled to sell via negotiation during the week of April 1, 2013.
Fitch also affirms the 'AA' rating on $1.3 billion in outstanding post-event bonds, series 2008A and 2010A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by reimbursement premiums and emergency assessments, as well as investment income on unspent, pre-event bond proceeds. Primary security and rating are derived from FHCF's ability to levy emergency assessments on nearly every property and casualty (P&C) insurance policyholder in the state for as long as debt is outstanding. Assessments are subject to a 6% cap related to one year's loss and a 10% cap for cumulative years' losses.
KEY RATING DRIVERS
TAX-LIKE ASSESSMENT SECURES BONDS: The bonds are secured by emergency assessments levied on almost all P&C insurance policies in the state of Florida, a broad and diverse source of revenue. The emergency assessment rate can be reset each year and, at 1.3%, is currently well below its statutory ceiling.
CURRENT LIQUIDITY STRONG: Financial position is improved following several years of no catastrophe losses and regulatory changes that reduced the FHCF's exposure and enhanced its ability to grow its fund balance.
LIMITED LIABILITY: FHCF's reinsurance obligation is limited by a statutory maximum, currently $17 billion, and it cannot offer coverage in excess of its claims-paying capacity, which includes both funds in hand and bonding capacity.
EXPOSURE TO STATUTORY CHANGES: The credit profile of the FHCF is subject to legislative action that may affect the risk or size of its insurance exposure or the ability to grow its claims-paying resources.
SOLID LONG-TERM ECONOMIC PROSPECTS: Florida's long-term economic fundamentals are strong with future growth expected; however, income levels have declined relative to the nation and region due to the recession and slow recovery and the housing market remains weak.
RATING SENSITIVITIES:
--Fundamental change in the Florida economy that materially reduces the claims-paying base;
--Legislation that changes FHCF's risk profile, or affects its operations or ability to grow its claims-paying resources;
--Unusually severe hurricane activity that depletes FHCF's claims-paying resources or necessitates significant additional borrowing.
CREDIT PROFILE
The Florida Hurricane Catastrophe Fund (FHCF), a type of state-run property re-insurer, has statutory authority to levy assessments on a broad range of P&C insurance policyholders in Florida following a large windstorm event to cover reimbursement claims or debt service on pre- and post-event bonds. The 'AA' rating reflects this access to special tax-like emergency assessments, as well as FHCF's stronger liquidity position after several years of limited hurricane activity and state involvement in ensuring the availability of property insurance in Florida.
REINSURANCE PROVIDER
The FHCF is a tax-exempt trust created by the state legislature to improve the availability and affordability of residential property insurance in Florida following the extensive damage caused by Hurricane Andrew in 1992. FHCF provides reinsurance coverage to the approximately 162 residential property insurers doing business in the state, reimbursing insurers after their hurricane-related residential property insurance losses have reached their retention limit. Participation in the FHCF program is, with limited exceptions, mandatory for insurers writing residential property insurance in the state. Insurers may choose coverage of 45%, 75% or 90%, although most choose the maximum 90% rate, as the FHCF reportedly provides the most cost-effective reinsurance available relative to the private reinsurance market.
TAX-LIKE ASSESSMENT
Ultimate security for the bonds is derived from FHCF's ability to levy 'emergency assessments' on nearly every P&C insurance policyholder in the state for as long as debt is outstanding to pay debt service on the bonds. The emergency assessments are billed to policyholders through the insurance carriers, on the same bill as their insurance premiums. Non-payment of the emergency assessment is grounds for cancellation of the policy, so collection rates are close to 100%.
The emergency assessment base, derived from the premiums written on P&C insurance policies in the state, is large and diverse and provides strong support for bondholders. The assessment is levied as a uniform percentage of up to 6% of that year's aggregate statewide direct written premium (DWP) on subject lines of insurance for losses in a single season, and up to a maximum of 10% for multi-year losses. The lines are very broad and include all P&C insurance, excluding only accident and health, workers' compensation and medical malpractice. As the Florida economy overall was hit very hard by the recession, the base declined from a high of $37.6 billion in 2006 to a low of $33.3 billion in 2009. The base has stabilized and, at the 2011 level of $34.6 billion, it could generate up to $3.5 billion per year in support of debt service, or over 9x maximum annual debt service on $1.3 billion in post-event bonds currently outstanding, with a final maturity of 2016. The base is projected to have increased in 2012 to $35.6 billion.
LIMITED LIABILITY
The FHCF's reimbursement obligation is limited to the lesser of its annually set statutory limit or its claims-paying resources. These consist of funds on hand at the beginning of the contract year, June 1, which also corresponds to the start of the hurricane season; reimbursement premiums collected over the course of the year; and its bonding capacity. For the contract year that begins June 1, 2013, the FHCF will provide a total of $17 billion in coverage. Claims-paying resources consist of approximately $9.8 billion in cash balance supplemented by the $2 billion in pre-event financing currently being offered. The balance would be covered by post-event bonding capacity.
As a reinsurer, FHCF's reimbursement obligation does not commence until an industry retention layer is met by the insurers. For the 2013 season, the retention layer is $7.2 billion, corresponding with the probability of a 1-in-9-year event. The need to issue additional bonds will be triggered if industry losses exceed $19.7 billion, a 1-in-23-year event. Industry losses would need to reach $25.2 billion for the FHCF's full exposure to have been realized, which FHCF estimates corresponds to a 1-in-31-year event.
LEGAL PROVISIONS
The FHCF's credit can be both positively and negatively affected by legislative actions as was seen in 2004 and 2005 when mandatory coverage was increased following significant storms and then again in 2007 when optional coverage was increased. These statutory changes significantly increased the FHCF's exposure, changes which were subsequently reversed or allowed to expire. The FHCF cannot file for bankruptcy and cannot be legally dissolved while it has debt outstanding. The state has also covenanted not to take any action that would impair the revenues securing the debt. Other bondholder protections include a 1.25x coverage additional bonds test; post-event bonds also require 1.0x coverage solely from emergency assessments. The FHCF must certify each year that secured revenues cover debt service on parity obligations by at least 1.25x, or else take corrective measures, such as raising the emergency assessment rate, to achieve this coverage.
Until the recession, the Florida economy was characterized by rapid growth, economic broadening, and diversification as it was transformed from a narrow base of agriculture and seasonal tourism into a service and trade economy, with substantial insurance, banking and export components. Strong underlying fundamentals remain, including a relatively low cost of living, attractive tourist and retirement destinations, and favorable geographic location. However, despite signs of stabilization there remains uncertainty regarding the near-term economic outlook, and economic performance during the recession was among the weakest of the states. The state's natural amenities include 2,200 miles of tidal shoreline, proximity to Latin American and Caribbean markets, the presence of some of the world's most popular tourist destinations, large convention venues, and major cruise ship ports.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Tax-Supported Rating Criteria, dated Aug. 14, 2012
--U.S. State Government Tax- Supported Rating Criteria, dated Aug. 14, 2012
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
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