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Florida Cat Fund Prepares $2B Taxable Deal

BRADENTON, Fla. - The Florida Hurricane Catastrophe Fund Finance Corp. is preparing to sell up to $2 billion of taxable notes this spring for liquidity to pay claims, if needed.

Gov. Rick Scott and other trustees of the State Board of Administration, which oversees the so-called Cat Fund, unanimously approved the transaction last week.

The state-run, nonprofit reinsurer will be seeking the funds to replace $3.5 billion of taxable notes issued in 2007, which matured last year.

Cat Fund director Jack Nicholson said he views the upcoming issuance as a form of risk management.

“It’s a way of providing liquidity and addressing some of the risk of the volatility in the bond markets,” he said.

“One of the important things is being able to pay for large events that can develop losses very quickly,” Nicholson said.

The amount to be borrowed this year is less than what was sought in 2007 because Florida has not been hit with a hurricane since 2006.

The break from a devastating storm has enabled the Cat Fund to build up cash resources, Nicholson said.

Barring any major storms this year, he said the fund expects to have $9.88 billion in cash on hand by the end of December.

With the additional $2 billion from the upcoming deal, the agency would have about $12 billion to pay claims quickly after a qualifying event.

The Cat Fund’s current obligation is to pay a total of about $17 billion in claims.

Any losses above what the fund has on hand in cash would be raised through additional tax-exempt bond issues.

Though the structure for the upcoming $2 billion deal has yet to be finalized, the finance team is considering taxable notes with three-, five-, and seven-year maturities. The proceeds would be invested and used to pay back the debt, if not needed to pay claims.

Nicholson said he and the finance team are meeting this week to examine the tentative schedule for developing a road show, meeting with rating agencies, and setting a tentative pricing date. Bond documents already have been prepared.

In 2004 and 2005, Florida was hit by a record eight hurricanes and claims for losses have been filed over the years since. The Cat Fund expects to pay participating insurers a total $9.76 billion, according to its 2012 audit.

The fund’s $1.3 billion of outstanding tax exempt revenue bonds are rated AA by Fitch Ratings, Aa3 by Moody’s Investors Service, and AA-minus by Standard & Poor’s.

The financial advisor for the upcoming transaction is Raymond James | Morgan Keegan.

Barclays will be lead senior managing underwriter, while Citi, Goldman, Sachs & Co., and JPMorgan will be co-senior managing underwriters.

Others in the syndicate are BB&T Capital Markets, Jefferies & Co., Loop Capital Markets LLC, Bank of America Merrill Lynch, Morgan Stanley & Co., M.R. Beal & Co., RBC Capital Markets, Samuel A. Ramirez & Co., Siebert Brandford Shank & Co., SunTrust Robinson Humphrey, and Wells Fargo Securities.

Bond counsel is Nabors, Giblin & Nickerson PA. Disclosure counsel is Bryant Miller Olive PA.

The Florida Hurricane Catastrophe Fund was created in November 1993 by the Legislature as a nonprofit entity to stabilize the market following Hurricane Andrew, and offer affordable reinsurance to companies providing homeowner’s coverage, including state-run Citizens Property Insurance Corp.

The Cat Fund received an initial private-letter ruling in 1998 from the Internal Revenue Service to issue tax-exempt bonds to pay claims following a qualifying event. A permanent IRS ruling was obtained in June 2008.

While the fund can issue tax exempt bonds to pay claims after an event, it must issue taxable bonds and notes before an event to fund liquidity needs. Taxable proceeds are invested until needed to pay claims.

Tax-exempt bonds are repaid with cash on hand, such as premiums, and assessments on property insurance policies statewide.

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