BRADENTON, Fla. — With market conditions continuing to improve following the liquidity crisis in 2007 and 2008, the state-run Florida Hurricane Catastrophe Fund should have no problem issuing bonds to pay claims over the next 12 months.
In addition to using its fund balance and proceeds of a recent $2 billion taxable note sale, the so-called Cat Fund could borrow more than the $5.2 billion that is needed to meet its reinsurance obligations, Advisory Board members were told Thursday.
The total projected borrowing capacity in the bond market to pay claims is $7.3 billion, according to a report by financial advisor Kapil Bhatia with Raymond James.
“We are probably in the best shape ever from the Cat Fund’s potential for claims paying capacity,” Bhatia said.
The estimates on how much the fund could potentially borrow were derived by reviewing various credit factors, consulting with the fund’s four senior managing underwriters — Barclays, Citi, Goldman Sachs & Co., and JPMorgan — and appraising past and current market conditions.
The success of the Cat Fund’s April 10 sale of short-term taxable notes to provide liquidity and pay claims quickly after a storm was also factored into the evaluation of potential borrowing capacity.
Taxable notes were sold because the Cat Fund is only allowed to issue tax exempt debt after a hurricane that requires claims to be paid.
Proceeds of the April 10 notes will be invested and will pay off the notes unless the proceeds are needed to pay claims.
The $2 billion of taxable bonds were sold with three-, five-, and seven-year maturities at a blended true interest cost of 2.61%, which was less than the 3% borrowing rate anticipated by underwriters.
More than $3.6 billion in orders from 139 investors were received, according to Raymond James’ Rick Patterson.
“The successful pricing of the transaction was the result of an extensive marketing campaign,” he said.
The success of the deal was also attributed to general improvement in the market and tightening of credit spreads as investors became more comfortable with the Cat Fund’s name, Bhatia said.
The deal also opened up the universe of investors likely to participate in future deals, he said, since some of them manage both tax exempt and taxable bond funds.
The Advisory Board unanimously approved a total of $17 billion in estimated claims-paying capacity for the upcoming year. That number includes a $9.7 billion fund balance projected by the end of this year, the proceeds of $2 billion in taxable notes, and borrowing of $5.24 billion.
While the Cat Fund would exhaust cash on hand to pay claims and debt, it also can raise revenue through the placement of emergency assessments up to a 10% on nearly all property and casualty insurance policies in the state.
The more than $36 billion assessment base is a major reason why the Cat Fund’s bonds are rated AA by Fitch Ratings, Aa3 by Moody’s Investors Service, and AA-minus by Standard & Poor’s.
The nonprofit Hurricane Catastrophe Fund was created in 1993 by the Legislature following Hurricane Andrew to help stabilize the insurance market after some companies became insolvent or left the state because of the risk and high cost of reinsurance. The Cat Fund offers reinsurance at three times less than the product costs in the private market, and represents a savings of about $2 billion to insurance companies.
The Advisory Board also learned Thursday that the Cat Fund no longer will sell bonds under the name of the Florida Hurricane Catastrophe Fund Finance Corp. A bill that passed during the recent legislative session renames the credit to the State Board of Administration Finance Corp.
The name change is designed to improve marketability of the bonds and eliminate investor confusion with entities that sell catastrophe bonds.