BRADENTON, Fla. - Conditions in the financial markets favor the Florida Hurricane Catastrophe Fund's issuance of up to $4 billion of bonds if needed to pay hurricane-related claims during the six-month season that starts June 1.
"In capital markets, risk appetite is high and similar to 2005 levels," Raymond James managing director Kapil Bhatia told the fund's advisory council Thursday while presenting a semi-annual analysis of debt capacity and the state-run fund's total claims-paying ability. Raymond James & Associates Inc., is the Cat Fund's financial advisor.
The fund's obligation to pay claims during the upcoming season is up to $17 billion, is based on certain legal limitations as well as reinsurance coverage selected by private property insurers and the state-run Citizens Property Insurance Corp.
The Cat Fund plans to pay for the obligation from several sources, including a historically high fund balance of $11 billion from premiums collected over the last eight years in which no hurricane triggered loss claims.
Some $2 billion would come from taxable municipal notes sold in 2013. Another $4 billion could be raised in the bond market because "conditions have significantly improved and are currently expected to be conducive to favorable debt issuance," the claims-paying report said.
The debt capacity is based on feedback from the Cat Fund's five senior managing underwriters - Bank of America Merrill Lynch, Citi, JPMorgan, Morgan Stanley & Co., and Wells Fargo. In the aggregate, the underwriters said the fund could issue as much as $8.3 billion of debt, up more than $2 billion from last year.
Declines in primary market supply could help the Cat Fund.
In 2013, the municipal bond market was down 15% compared to 2012, with $312 billion in issuance, Raymond James' report said. Year-to-date, 2014 issuance is 25% lower than 2013, with $88 billion issued through April 30 compared to $117 billion over the same period in 2013.
"The reduction in issuance is encouraging for the FHCF as it may be an indication of significant pent-up demand in the tax exempt markets," said the report.
The report, while cautioning that the financial markets can be highly volatile, also said there are other positive indicators independent of market trends should the Cat Fund need to issue a sizeable amount.
One indicator is that the FHCF is a well-regarded credit rated in the double-A category, and closely associated with the state of Florida, a "blue-chip name in the market," said the report. Florida does not guarantee the fund's debt.
Another indicator is demand for the Cat Fund's sale of $2 billion in 3, 5, and 7-year taxable notes in April 2013 at a true interest cost of 2.61%, according to Raymond James. The 2013 deal was 1.79 times oversubscribed with more than $3.6 billion in orders. The transaction helped establish the FHCF in the taxable market, and reflected that there is significant capacity to issue bonds at cost-effective rates, the report said.
Bond issues of the size the Cat Fund may need to undertake following a hurricane would also be included in the various benchmark indices market observers use to track market performance.
"So institutional money managers seeking to at least match indexed returns may have a strong additional incentive to buy the FHCF's bonds particularly if offered at interest rates marginally higher than those typically associated with AA category credits," said the report.
The Cat Fund was created in 1993 after Hurricane Andrew to stabilize the state's property insurance market by offering below-market reinsurance. The Cat Fund issues taxable- and tax-exempt municipal bonds if needed to pay claims.
