Fitch Affirms Florida Hurricane Catastrophe Fund Rev Bonds at 'AA'

NEW YORK--()--Fitch Ratings affirms the 'AA' rating on the following Florida Hurricane Catastrophe Fund Finance Corp. bonds:

--$2 billion revenue bonds, series 2013A.

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 the FHCF's ability to levy emergency assessments on nearly every property and casualty (P&C) insurance policy holder 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 property & casualty insurance policies in the State of Florida, a broad and diverse source of revenue. Although not currently being assessed given the defeasance of remaining post-event bonds, the emergency assessment rate is flexible and can be set annually.

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: The FHCH's reimbursement 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 available 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: Long-term economic fundamentals are strong with future growth expected. The pace of economic growth has accelerated and the housing market continues to show signs of improvement.

RATING SENSITIVITIES

The rating is sensitive to fundamental change in the Florida economy that materially reduces the claims paying base, legislation that changes the FHCF's risk profile, or affects its operations or ability to grow its claims-paying resources, and to unusually severe hurricane activity that depletes claims-paying resources or necessitates significant additional borrowing.

CREDIT PROFILE

The Florida Hurricane Catastrophe Fund (FHCF) Finance Corporation, renamed the State Board of Administration Finance Corporation by statute during 2013, is a financing entity for the FHCF. The FHCF is a mandatory state-run property re-insurer that 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/or post-event bonds. The 'AA' rating reflects this access to special tax-like emergency assessments, as well as the 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. The FHCF provides a type of reinsurance coverage through a reimbursement contract to the approximately 156 participating 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 coverage available relative to the private reinsurance market.

TAX-LIKE ASSESSMENT

Ultimate security for the bonds is derived from the FHCF's ability to levy 'emergency assessments' on nearly every P&C insurance policy holder in the state for as long as debt is outstanding to pay debt service on the bonds. The emergency assessments are billed to policy holders 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 property and casualty 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 property and casualty 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 before beginning to rebound in 2010. With resumption of economic growth in the state, the assessment base has demonstrated stronger growth in recent years, increasing 3.1% in 2011, 4.5% in 2012, and 4.8% in 2013. The current assessment base of $37.9 billion could generate up to $3.8 billion per year in support of debt service.

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 calendar year; and its bonding capacity. For the contract year that begins June 1, 2015, the FHCF will provide a total of $17 billion in coverage. Claims paying resources consist of approximately $12.9 billion in projected cash balance supplemented by the $2 billion in pre-event financing provided by the 2013 bonds. The balance of approximately $2.1 billion could be covered by post-event bonding capacity.

As a reinsurer, the FHCF's reimbursement obligation does not commence until an industry retention layer is met by the insurers. For the 2015 season, the retention layer is $6.9 billion, corresponding with the probability of an estimated1-in-9 year storm event. The need to issue additional bonds will be triggered if industry losses exceed $22.6 billion, estimated to occur after a 1-in-30 year event. Industry losses would need to reach $24.9 billion for the FHCF's full exposure to have been realized, which FHCF estimates corresponds to an estimated 1-in-34 year event.

LEGAL PROVISIONS

The FHCF's credit can be both positively and negatively affected by legislative actions as was seen in 2007 when statutory changes significantly increased 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.

STRONGER FLORIDA ECONOMY

The economic recovery in Florida continues to accelerate. Having emerged slowly at first from the national recession, the labor market is showing signs of a stronger recovery - employment is up and the unemployment rate down, the housing market is improving, and collections of economically sensitive state revenues are increasing.

Additional information is available at 'www.fitchratings.com'.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981149

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1 212-908-0575
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1 212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Laura Porter
Managing Director
+1 212-908-0575
or
Committee Chairperson
Marcy Block
Senior Director
+1 212-908-0239
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com