Florida Catastrophe-Insurance Bonds Pay Price for Ominous Name
Oct 20, 2010
The following article was published in Bloomberg Business Week on October 20, 2010:
By Simone Baribeau
Florida’s state-run fund backing insurers against hurricane losses is paying the price for its ominous name.
Bonds of the Florida Hurricane Catastrophe Fund Finance Corp., which has $8.2 billion of debt outstanding, yield about 1 percentage point more than similarly rated securities, said John Forney, director of public finance at Raymond James & Associates Inc., the fund’s financial adviser.
“People don’t necessarily want to buy something called the catastrophe fund,” Forney told the fund’s advisory council in Tallahassee yesterday. “We won’t rest until we’ve gotten it down to where it should be for a credit as strong as the CAT fund.”
The extra yield investors demanded to hold a five-year 5 percent tax-exempt catastrophe-fund revenue bond maturing in July 2013 was 139 basis points more than an index of yields of similar debt yesterday, according to data compiled by Bloomberg.
A 4 percent 10-year revenue issue of the Florida Department of Environmental Preservation, also due in July 2013 and similarly rated, yielded only 30 basis points more than the index, the data show. A basis point is 0.01 percentage point.
“If they were just an innocuously named Florida governmental agency, the spread would be narrower,” Terry O’Grady, senior vice president of municipal trading at FMS Bonds Inc. in North Miami Beach, Florida, said in a telephone interview referring to the catastrophe fund’s bonds. “We find their security to be exceptional.”
The catastrophe fund was created in November 1993 to maintain the state’s private insurance industry after companies pulled out following Hurricane Andrew in 1992, which caused $25 billion of damage in the U.S. The fund reimburses insurers for part of their hurricane losses by selling them reinsurance coverage.
The fund’s bonds are rated AA- by Standard & Poor’s and Aa3 by Moody’s Investors Service, the fourth-highest grade at both credit evaluators. Fitch Ratings upgraded the fund in May to AA, its third-highest rank, from AA-.
The 1 percent assessment on insurance premiums in Florida that backs the bonds is “a very stable source of revenue,” Fitch said. Economic pressures facing the state have had “only a modest impact” on premiums, it said.
Some investors may see extra risk in Florida’s catastrophe bonds because the timing and size of borrowing depends on the weather, Forney said. The fund is still reimbursing insurers for damage claims from 2005, the most active season on record, when Hurricanes Wilma, Katrina, Rita and Dennis struck the state. In May, it sold $693 million of securities for the claims.
“We call it headline risk,” said Michael J. Schroeder, president and chief investment officer of Wasmer, Schroeder & Co. in Naples, Florida, which has $3.8 billion of assets under management, including the state’s catastrophe bonds. “Fewer people are going to want bonds with negative newspaper stories attached.”
Florida has been spared a major storm in the last two years. The National Hurricane Center in Miami said yesterday that a Caribbean weather system has a 50 percent chance of becoming the 17th named storm of the six-month season that ends Nov. 30. If it does, the current Atlantic season would become the sixth most-active on record, according to center. The 16 storms so far are tied with 2008, 2003 and 1936 for seventh place.
The Florida catastrophe fund has $9.4 billion of assets available to pay storm claims, the council was told, compared with $9.5 billion in May, according to a presentation at the time. The probability of a storm causing damage exceeding that amount is less than 5 percent, the council heard, and the fund can borrow enough to cover its statutory obligation to pay as much as $18.8 billion of claims.
Forney said the fund is making progress educating investors on its bonds. Fifteen-year catastrophe maturities were trading at 300 basis points more than top-rated securities in May 2009, his semiannual presentation to the advisory council said. The gap narrowed to 186 basis points this month, it said.
“We want to make sure we do enough outreach to investors to try to minimize that penalty,” Forney said. “We can fight to get it down and we have gotten it down.”