Florida’s CPIC Readies Up to $2.4B

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BRADENTON, Fla. — With the 2010 hurricane season set to begin June 1, Florida’s Citizens Property Insurance Corp. is preparing to price between $2 billion and $2.4 billion of debt to raise ready cash in case it is needed to pay claims for storm-related damages.

As it has done in previous years, the state-run, nonprofit CPIC is raising liquidity in case it is needed to pay a huge amount of property damage claims in a catastrophic event.

The bond proceeds will only be used to support policies in a high-risk account that provides multi-peril, windstorm, and hail coverage along Florida’s hurricane-prone coast. Though the state was battered by an extraordinary eight hurricanes in 2004 and 2005, none have caused major damage in the years since.

CPIC officials said plans are to remain flexible on the structure of the upcoming transaction until pricing.

The insurer expects to sell mostly fixed-rate tax-exempt bonds, but portions of the deal may also be tax-exempt short-term notes, tax-exempt floating-rate notes, and federally taxable floating-rate notes.

Marketing of the offering began this week and will continue until pricing, which will be March 22-23 for retail and March 24 for institutional.

However, the retail order period may be cut to one day if conditions warrant, officials said.

The deal is expected to be structured to meet the needs of all interested investors, said Citizens’ chief financial officer, Sharon Binnun.

It may be structured as Series A-1 fixed-rate bonds, Series A-2 fixed-rate short-term notes, Series A-3 floating-rate notes based on the Securities Industry and Financial Markets Association index, and Series A-4 taxable floating-rate notes based on the London Interbank Offered Rate.

Insurance is being evaluated and only will be used if there is an overall benefit, Binnun said.

Maturities also will be flexible, but between three years and seven years is the target.

However, maturities could be as long as 15 years, said John Forney, the agency’s financial adviser with Raymond James & Associates Inc. The final determination will be based on pricing and demand, he added.

A dozen firms are in the syndicate led by JPMorgan senior managing the sale of the fixed-rate portion and Goldman, Sachs & Co. senior managing the sale of the floating-rate notes.

CPIC last year sold bonds for similar purposes and that was the first year a separate retail order period was included, according to Forney.

“It was very successful and key to getting the deal done,” he said. Of the $1.6 billion deal, $360 million was sold to retail, “so it was a very good response on the retail side.”

The deal itself is not only structured to draw out investors but to elicit the best rates and lowest cost of debt. For example, none of the variable-rate notes will require remarketing agents or letters of credit.

Unlike private insurers, Citizens is a governmental agency with the ability to issue municipal debt. And Binnun thinks investors will weigh those factors.

“Investors have the opportunity to invest in municipal debt when they invest with us and obtain returns appropriate with the risk,” she said.

“I’m feeling cautiously optimistic based on information I’ve heard from our underwriting team,” Binnun said. “We’re [selling] well in advance of hurricane season, thank goodness. If a storm comes, we want to make sure we’re ready, and if it doesn’t come, that’s lovely.”

Moody’s Investors Service assigned a long-term rating of A2 to the bonds and a MIG-1 rating to the notes. Standard & Poor’s assigned an A-plus to the bonds and an SP-1-plus to the notes.

Standard & Poor’s maintained a negative outlook placed on CPIC in January 2009 that is based on a negative outlook on Florida’s ratings, while Moody’s changed its outlook to stable from negative in advance of the upcoming sale.

“The change in outlook reflects the announcement by State Farm that it will continue to offer insurance in the state after announcing in 2009 that it would leave the state; the legislative decision to allow Citizens to raise property insurance rates; and the overall political environment around property insurance in the state in recent years, which has been volatile but, at the moment, is beneficial to the stability of CPIC,” Moody’s analyst Emily Raimes said in a report.

State Farm Florida Insurance Co., the largest private property insurer in Florida with more than 800,000 policies, threatened to exit the state after state insurance regulators denied the company’s request to raise rates by an average of more than half. The exit could have pumped many of the dropped policies into CPIC.

But a state appeals court ruled that State Farm failed to provide adequate justification for the rate increase it sought, and the company negotiated an agreement with the state for a 14.8% increase and non-renewal of no more than 125,000 residential policies.

In 2007, the Legislature rolled back CPIC’s rates, then prohibited any rate increases through 2009.

That prohibition has expired and Citizens has received approval to raise rates an average of 5.2% for homeowners and 11% for mobile homeowners.

CPIC was created by the Legislature in 2002 to offer property insurance coverage to Floridians without private insurance options.

It is the largest residential insurer in the state, with more than a million policies, of which 411,574 are in the high-risk account.

Other underwriters working on the upcoming sale are Bank of ­America Merrill Lynch, Citi, First Southwest Co., Jefferies & Co., Loop ­Capital Markets LLC, Morgan Stanley, Ramirez & Co., RBC Capital ­Markets, Siebert Brandford Shank & Co., and Wells Fargo Securities.

Squire, Sanders & Dempsey LLP is bond counsel. Bryant Miller Olive PA is disclosure counsel. Nabors, Giblin & Nickerson PA is underwriters’ counsel.

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