BRADENTON, Fla. — The Florida Hurricane Catastrophe Fund may seek up to $1.7 billion of financing from the municipal market in the upcoming months.
The so-called Cat Fund’s advisory board Thursday gave its staff wide latitude to develop a pre-event financing program, including the total amount to be sought.
However, it is likely that a financing up to $1.7 billion will be considered to close a gap in claims-paying needs.
Such a pre-event financing would be on a taxable basis and the proceeds would be used for liquidity, if needed, in the early months to pay claims after a hurricane.
The final structure of a deal, including the amount, will be determined in the coming months by the State Board of Administration trustees, who are mostly Cabinet members, including the governor.
In addition to pre-event financing, the advisory board discussed at length its recommendation on how much in bonding capacity the state-run insurer could expect to find in the municipal market after a hurricane to pay claims.
An assessment by the fund’s finance team, including senior underwriters, showed that an estimated $7 billion could be raised, according to John Forney, the Cat Fund’s financial advisor with Raymond James | Morgan Keegan.
“The municipal market is demonstrably better than it was in October [of 2007],” Forney said, adding that this year’s capacity need is the lowest since 2008.
That’s largely due to the fund’s strong position because of a lull in hurricane activity since 2005, which allowed it to build up resources. At the end of this year, the fund will have about $8.5 billion in cash on hand.
Coming to a decision about what to recommend for bonding capacity wasn’t easy for board members, who discussed at length the volatility in the municipal bond market and changes in the investor base since the credit crisis.
Forney, however, said underwriters who participated in developing bond estimates had no incentive to provide larger numbers than actually exist.
“After an event, everybody will work hard to do what needs to be done,” he said, referring to selling the most bonds possible.
The advisory board set the 2012 bonding capacity at an estimated $7 billion.
Along with the fund balance, that means the Cat Fund would have a total of $15.5 billion to pay claims during this year’s June-through-November hurricane season in addition to proceeds of the pre-event financing.
The Cat Fund was created by the state in 1993 as a tax-exempt trust fund to stabilize the property insurance market. It provides a specific amount of coverage each year for insurer’s losses similar to reinsurance.
The fund’s bonds are rated Aa3 by Moody’s Investors Service, AA-minus by Standard & Poor’s and AA by Fitch Ratings.
Florida Citizens Property Insurance Corp., a state-run, tax-exempt property insurer, also plans to sell up to $1.5 billion of bonds in the coming months.
Citizens bonds will also provide liquidity for hurricane-related property insurance claims, if needed. They are expected to be sold by early June.
