Fitch Rates Florida Hurricane Catastrophe Fund 2006A & B Revs 'AA'.
The 'AA' rating is based on the breadth and stability of the revenue streams that comprise the pledged security and the strong debt service coverage the pledged revenues provide. Bonds are secured primarily by emergency assessments paid by policyholders on most lines of property and casualty insurance sold in the state, reimbursement premiums paid by residential property insurers, and investment income on series 2006B pre-event bond proceeds. Expenses of the FHCF are paid before debt service; these have totaled about $4 million per year (insured losses are not an expense within the indenture). The series 2006A bonds are additionally secured by a parity common reserve, expected to be funded at 50% of maximum annual interest. The FHCF corpus is not pledged. The FHCF's reinsurance obligations under its reimbursement contracts are limited to the extent of its fund balance plus its maximum bonding capacity or $15 billion per hurricane season, whichever is less.
Emergency assessments are intended as the primary debt repayment source for the series 2006A post-event bonds. Once post-event bonds are issued, emergency assessments must be levied to bring debt service coverage up to at least 1.25 times (x) maximum annual debt service (MADS). Annual assessments continue as long as revenue bonds remain outstanding. The emergency assessments required for the series 2006A bonds is expected to be about 0.84% of the 2005 direct-written premiums base on all property and casualty insurance written in the state, excluding medical malpractice insurance until June 2007, and workers' compensation, accident and health insurance, and insurance provided under the National Flood Insurance Program. The assessment base, which totaled $35 billion in 2005, also includes all surplus lines of insurance. The emergency assessments will provide for complete amortization of the series 2006A bonds in six years. Emergency assessments to secure post-event bonds issued to fund deficits are limited to 6% of the above premium base for the prior year per season and 10% of the premium base in the aggregate. The direct-written premium base from which emergency assessments are based has grown at a CAGR of 14.6% since 1970. Over 40% of the direct-written premium base is from auto insurance.
Premiums on reimbursement contracts are used to build the fund balance and provide a cushion for debt service in the unlikely event of a shortfall in emergency assessments. Reimbursement premiums totaled $617 million in 2005. Participation in reimbursement contracts is mandatory for almost all of the 205 authorized insurers of residential property in Florida. Approximately 99% of the FHCF's reimbursement premiums are paid by 95 companies, 64% by the top 10 insurers.
The series 2006B bonds are being issued on a taxable basis to provide liquidity for the 2006 season. They will be sized, in combination with some anticipated bank lines of credit, to provide 10 weeks of liquidity based on a one-in-fifty year event. They are expected to be repaid from investment income on the 2006B bond proceeds, plus reimbursement premiums (emergency assessments are also available as a backup source). The proceeds will be invested on a match-funded basis, so interest on the proceeds matches interest on the bonds (negative arbitrage would be funded from reimbursement premiums). If proceeds from the series 2006B bonds are drawn down to pay future claims, it is expected that the bonds would be refinanced with post-event, tax-exempt debt.
The FHCF's risk is somewhat geographically diverse. No one county is responsible for more than 9.8% of the fund's exposure. Dade, Broward, and Palm Beach are contiguous and make up less than 28% of the FHCF's total exposure. This mitigates the losses the insurance industry is likely to suffer in a major hurricane, and mitigates the possible reduction in the insurable base resulting from a large hurricane. Future bonds may be issued up to an additional bonds test of 1.25x MADS.
Fitch maintains the 'AA' rating and assigns a Stable Rating Outlook despite several structural changes in the FHCF program which have weakened bondholder security slightly. In 2005, the Florida legislature enacted a change that allowed insurers' retentions to be stepped down to one-third of their full retentions on the third and subsequent hurricanes in a single season. Also, the additional bond test was weakened to 1.25x MADS from 1.50x. Mitigating these risks are the FHCF's limited reimbursement liability and the 10% aggregate cap on emergency assessments. While the additional risks make it somewhat more likely that the 10% cap will be reached, the cap still limits the burden to policyholders and provides an effective constraint on leverage. One change undertaken this year has increased bondholder security; beginning in 2006, the FHCF is authorized to charge a 25% rapid cash build-up factor on reimbursement premiums. This is expected to increase reimbursement premiums by about $200 million a year.
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|Date:||May 16, 2006|
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