Miami Herald: Fitch Upgrades Florida Hurricane Catastrophe Fund Finance Corp. to ‘AA’
May 11, 2010
The Miami Herald published the following on May 10, 2010:
Fitch Upgrades Florida Hurricane Catastrophe Fund Finance Corp. to ‘AA’
NEW YORK — Fitch Ratings assigns an ‘AA’ rating to the following Florida Hurricane Catastrophe Fund (FHCF) Finance Corp bonds:
–$693 million revenue bonds, series 2010A.
The bonds are expected to sell competitively on or about May 12, 2010.
In addition, Fitch upgrades the following ratings to ‘AA’ from ‘AA-‘:
–$849 million revenue bonds series 2006A;
–$3.5 billion taxable floating-rate notes series 2007A;
–$625 million revenue bonds series 2008A.
The Rating Outlook is Stable.
–The rating upgrade, based on new criteria for rating debt issued by state-sponsored property insurers, reflects changes in statutory regulations that reduce the FHCF’s exposure and enhance its ability to further grow its fund balance. These improve the FHCF’s ability to pay all claims from the residential property insurers participating in its reinsurance program.
–The bonds are secured by emergency assessments levied on almost all property & casualty insurance policies in the State of Florida, a very stable source of revenue. While the state faces significant economic pressures, these have had only a modest impact on property and casualty insurance premiums to date. The emergency assessment rate can be reset each year and is currently well below its statutory ceiling.
Key Rating Drivers:
–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.
–Unusually severe hurricane activity could deplete the FHCF’s claims-paying resources, necessitating additional borrowing and/or prompting further legislative changes to the program.
The series 2010A bonds, which are being issued to fund additional claims from the hurricanes that hit the state in 2004 and 2005, are secured on a parity basis with the series 2006A and 2008A bonds by emergency assessments that are levied on premiums for most property and casualty insurance policies sold in the state, including auto, property, and business insurance. The bonds are also secured by reimbursement premiums charged to insurers participating in the FHCF’s reinsurance program. The 2007A notes are secured by the proceeds and interest on the proceeds of the 2007A notes, as well as by reimbursement premiums.
Operations of the FHCF: The FHCF is a tax-exempt trust created by the State Legislature in November 1993 to improve the availability and affordability of residential property insurance in the state following the extensive damage caused by Hurricane Andrew in 1992. The FHCF provides reinsurance to the approximately 186 residential property insurers doing business in the state, reimbursing insurers after their hurricane-related residential property insurance losses have reached their retention limit. The FHCF Finance Corp. is a public benefits corporation whose sole purpose is to issue debt to fund claims-paying resources for the FHCF.
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 is the most cost-effective reinsurance available. The FHCF also has an optional reinsurance product that participating insurers may purchase for coverage above its mandatory policy limit; this is being wound down over the next three years. In addition, limited apportionment companies (those with less than $25 million in policyholders’ surplus) may purchase optional insurance for claims below their retention threshold.
The FHCF’s reimbursement obligation is for the lesser of its statutory limit or its claims-paying resources. The FHCF’s claims-paying resources consist of funds on hand at June 1, the beginning of the contract year (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 2010 hurricane season (2010-11 contract year), the FHCF expects to provide a total of $20.2 billion in coverage, consisting of $17 billion in mandatory coverage, $2.7 billion in optional coverage above the mandatory coverage limit, and about $461 million in optional coverage below the retention limit to limited apportionment companies. It estimates its claims-paying resources to be $20.4 billion, consisting of $9.4 billion of cash on hand plus reimbursement premiums to be collected over the year, and $11 billion in bonding capacity. If the FHCF sold the maximum allowed $8 billion of optional coverage (not expected, given the price of the coverage), its total exposure would be $25.5 billion, which exceeds its estimated resources by about $5.1 billion.
The industry retention layer for the 2010 season is $7.1 billion, corresponding with the probability of a 1-in-9-year event. The need for FHCF Finance Corp. to issue additional bonds would be triggered if industry losses exceed $17.2 billion, a 1-in-21-year event. The $17 billion mandatory coverage level would be fully exhausted if industry losses reach $25.2 billion, corresponding with a 1-in-32-year event, and the $2.7 billion in expected optional coverage above the mandatory coverage would be fully exhausted if industry losses reached approximately $30 billion. Industry losses would have to reach $34 billion for the FHCF’s full $25.5 billion in theoretical exposure to be realized, which corresponds to a 1-in-45-year event.
The FHCF’s credit has been negatively affected by legislative actions in the past, most prominently in the aftermath of the 2004 and 2005 hurricanes when statutory changes significantly increased the exposure of the FHCF. Most of those changes have since either been reversed or expired. Additionally, although significant claims have continued to be paid for the 2004 and 2005 hurricanes, the FHCF has had no claims from hurricanes that have hit after 2005, allowing it to significantly rebuild its resources.
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.
Secured Revenues and Debt Service Coverage: Once post-event bonds, such as the series 2006A, 2008A and 2010A are issued, emergency assessments, which are akin to a tax, must be levied at a sufficient rate to cover the debt service. The emergency assessments are levied on premiums for most property and casualty insurance policies sold in the state, including auto, property, and business insurance. 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 current 1.0% emergency assessment rate will be increased to 1.3% to pay for the series 2010A bonds. The final maturity for all bonds will also be extended from 2014 to 2016. The FHCF may levy emergency assessments at a rate of up to 6% for losses covering a single season, and up to 10% to cover aggregate losses. The premium rate may be reset each year, as necessary.
The performance of the premium base from which emergency assessments are levied has historically been very strong, growing from about $10 billion in 1990 to $37 billion in 2006 with no year-over-year declines. However, due to the harsh economic problems in the state, it dropped an average 3.1% per year in 2007, 2008, and 2009 to the current $33.3 billion. The potential for further decline is tempered by the current unusually low level of economic activity, which is likely to grow over the long term.
The bonds are also secured by reimbursement premiums, which combined with the emergency assessments and investment earnings, cover all debt service by 4.9 times (x) to 5.6x in all years except 2013, the year the remaining $3.5 billion of 2007A notes become due; coverage in 2013 from secured revenues, including the proceeds of the taxable pre-event notes which have not been spent, is 1.4x. If the note proceeds are needed for a future event, they would likely be refinanced with tax-exempt, post-event bonds.
Bondholder protections include for all parity obligations a 1.25x coverage additional bonds test; post-event bonds also require 1.0x coverage solely from emergency assessments. The series 2006A, 2008A and 2010A bonds are also secured on a parity basis by a debt service reserve, funded at the least of maximum annual debt service, 125% average annual debt service, or 10% of par. 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.
State Economy: Florida’s poor economic performance, one of the most negative among the states, reflects the state’s severe housing market correction. State employment was down 6.1% in 2009, compared to a 4.3% loss for the nation. For March, employment in the state was down 2.3% year-over-year, vs. a 1.7% decline for the nation. The unemployment rate in the state was 12.3% in March vs. 9.7% for the nation. The state’s forecast for nonfarm employment was revised downward in February 2010, and the state now expects the drop of 4.5% in fiscal 2009 to be followed by a 3.8% decline in fiscal 2010 and growth of only 0.2% in fiscal 2011.
Personal income performance has been weak, growing at just 30% of the U.S. rate at 0.9% in 2008, and personal income was down in each of the first three quarters of 2009, with declines among the worst of the states. Based on an improved estimate released in February 2010, the state forecasts personal income down 1.4% in fiscal 2009 and then flat in fiscal 2010.
Applicable criteria available on Fitch’s website at www.fitchratings.com include:
–‘Guidelines for Rating Debt Issued by State-Sponsored Property Insurers’, Oct. 12, 2009.
Additional information is available at www.fitchratings.com.