NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Florida Hurricane Catastrophe Fund bonds issued by the State Board of Administration Finance Corp.:
--$1.2 billion revenue bonds series 2016A.
The bonds will be sold via negotiation the week of Feb. 1, 2016.
Fitch has also affirmed the rating on $2 billion in outstanding series 2013A bonds issued by the Florida Hurricane Catastrophe Fund Finance Corp at 'AA'.
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 Florida Hurricane Catastrophe Fund's ability to levy emergency assessments on nearly every property and casualty 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 (P&C) insurance policies in the State of Florida, a broad and diverse source of revenue. Although not currently being levied 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 exposure of the Florida Hurricane Catastrophe Fund (FHCF) and enhanced its ability to grow its fund balance.
LIMITED LIABILITY: The FHCF'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, available bonding capacity, and any reinsurance procured.
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 State Board of Administration Finance Corporation (formerly the Florida Hurricane Catastrophe Fund Finance Corporation) 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 no 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 157 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 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, medical malpractice, and federal flood and crop insurance.
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 stronger economic growth in the state, the assessment base has demonstrated stronger growth in recent years, increasing 3.1% in 2011, 4.5% in 2012, 4.8% in 2013, and 3.6% in 2014. The 2014 assessment base of $39.3 billion could generate up to $3.9 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; its bonding capacity; and any reinsurance procured. For the contract year that begins June 1, 2016, the FHCF will provide a total of $17 billion in coverage. Claims paying resources consist of approximately $13.8 billion in projected cash balance supplemented by the $2.7 billion available in pre-event financing, provided by the outstanding 2013A bonds (following $500 million July 1, 2016 maturity) and the current offering. The balance of approximately $500 million could be covered by post-event bonding capacity.
As a reinsurer, the FHCF's reimbursement obligation does not commence until a portion of the total industry retention layer is met by each participating insurer. For the 2016 season, the retention layer is $7.0 billion, corresponding with the average probability of a 1-in-9 year storm event. The need to issue additional bonds will be triggered if industry losses exceed $26.2 billion, estimated to occur after a 1-in-35 year event. Industry losses would need to reach $26.8 billion for the FHCF's full exposure to have been realized, which FHCF estimates corresponds to an estimated 1-in-36 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.
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'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=998173
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=998173
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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