Bonds

Year of the Cat: Florida can sell $3.8B of bonds to bulk up its insurance fund

The Florida State Board of Administration Finance Corp. has authorization to sell up to $3.8 billion of taxable revenue bonds this year to buttress the state’s Hurricane Catastrophe Fund.

In October, the corporation’s board approved the sale of the taxable pre-event bonds and is contemplating the issuance of $1.5 billion or more of its Series 2024A bonds, with a maximum final maturity of July 1, 2034. Morgan Stanley will lead the underwriting group on the deal, which may come in March or April.

Proceeds would go toward replenishing the Florida Hurricane Catastrophe Fund Finance Corp. (Cat Fund).

U.S. Army soldiers remove debris in Horseshoe Beach, Florida, after Hurricane Idalia hit the town in August. The corporation may sell bonds to boost its Cat Fund.

Bloomberg News

The corporation is the financing arm for the Cat Fund. It has statutory authority to levy assessments on property and casualty insurance policyholders in Florida after any large insurance-covered event that exhausts the Cat Fund’s cash resources to pay debt service on pre-event or post-event bonds and reimburses insurers for losses.

The $3.8 billion would be the maximum needed over a 12-month period, said Ben Watkins, director of the Florida Division of Bond Finance, who added the deal is expected to come to market near the end of the first quarter, around the end of March or April.

He said while the bonding authority wasn’t needed currently, it was good to have for a just-in-case scenario.

“This is a want to have, not a need to have,” he told The Bond Buyer. “So we’re going to be opportunistic based on what the market conditions are and what the interest rate environment is. We like to be like Boy Scouts — we always want to be prepared.”

He said now that the authorization was out of the way it would add another more permanent layer of protection in the Cat Fund’s capital stack.

“Back in 2020, we did a $3.5 billion pre-event financing with five-, seven- and 10-year maturities,” he said, “The five-year will be rolling off next year so there’s some thought as to have us be able to tread water from a liquidity standpoint, so we’ll need to replace that.”

The corporation will see where interest rates are and evaluate the demand at the end of March or April for the bonds, Watkins said.

He noted the Cat Fund had plenty of liquidity remaining.

“We’ve still got $4.3 billion in unreserved cash balances,” Watkins said, adding “we expect to get another $1.8 billion in reimbursement premiums coming in to cover storms for next year, which puts us at $6.1 billion. And then we’ve have another $3.5 billion of outstanding pre-event bonds from 2020, so that brings us up to $9.6 billion.

“And on top of that is a reserve of $10 billion that they created for Hurricane Ian and they’ve only spent $3.6 billion of that. So we’ve got ample liquidity of nearly $13 billion against maximum liabilities of $17 billion,” he said.

Watkins noted the fund was legally required to write $17 billion in coverage annually, to provide reinsurance to the marketplace.

“It’s critically important to the state — our economy and our housing market to have this mechanism to provide stability for the insurance marketplace,” he said.

Florida weathered a number of hurricanes in the past few years.

Hurricane Idalia made landfall in August as a Category 3 hurricane in the Big Bend area of Florida with winds of up to 125 miles per hour and a record storm surge in some parts of the Gulf Coast.

The total damage and economic loss from Idalia in the Southeast, which includes Georgia and the Carolinas, totaled about $3.5 billion. In comparison, the damage and economic loss from Hurricane Ian in 2022 were put at about $113 billion, the costliest in the state’s history.

Idalia left at least one person dead in Florida compared to the 150 killed in the state after Hurricane Ian hit.

In 2020, ahead of Ian, the Cat Fund was bolstered with bond proceeds from a pre-event deal that was upsized to $3.5 billion amid market conditions then favorable to issuers.

On that 2020 deal, Watkins noted BofA Securities ran the books, with BofA Managing Director Dave Andersen working closely with the issuer.

“Our primary objective on that transaction was to put a layer of capital in the Cat Fund’s capital stack providing a more permanent source of claims-paying resources. We went longer — five-, seven- and 10-years,” he said.

“Two factors that were at work then that will also be important for this transaction — one was extremely low interest rates, that was sold at 1.84% — locking in those extraordinarily low rates on a taxable basis over an extended period,” he said.

“Number two was expanding the Cat Fund’s investor base, which was very, very important in terms of positioning the Cat Fund going forward — and meeting with investors to get them familiar with the credit, to understand what it is and how it works and be comfortable with it,” he said.   

“On that transaction, we spent days doing investor education and outreach and we had 103 separate accounts that participated and put in orders on that transaction,” Watkins said. “And it was all of your household names on the large institutional account — the PIMCOs, the Vanguards, the Fidelitys, the BlackRocks, of the world — were significant participants on that transaction.”

He said there was no better way to get someone to understand the Cat Fund’s credit than to own it.

“If they own it, they follow it,” he said. “So the next time it comes to market it’s not a new story to them, it’s not unfamiliar territory. So I think we created a platform and a following for future financings that’s going to serve us well on this transaction.”

In July, Fitch Ratings affirmed its AA ratings on the Cat Fund’s outstanding 2020 taxable revenue bonds.

“The rating reflects access to special tax-like emergency assessments and a large and growing assessable base. Growth prospects for the assessments are strong given Fitch’s expectation of long-term expansion in the Florida economy. The revenue generating potential of the assessable base provides robust resiliency through a decline equivalent to the largest historical decline as well as a moderate downturn scenario, despite its historical volatility,” Fitch said.

The bonds provided money to the Cat Fund to meet potential reimbursement obligations in future storm seasons.

“The potential for significant leverage on the assessment base, which overlaps with that of Citizens Property Insurance Corp., the state-owned insurer, is an asymmetric risk that modestly tempers Fitch’s assessment of the unlimited nature of the pledge,” Fitch said. “The Florida Insurance Guaranty Association (FIGA) also borrows against an overlapping, but smaller, assessment base.”

Both Citizens and the Cat Fund can levy assessments, subject to a cap, on almost all property and casualty insurance policies to pay claims. Increased storm frequency and severity raises the likelihood of increased levies, according to Fitch.

“We want to be a known credit that is in the marketplace periodically with outstanding debt and that we keep the marketplace fully apprised of what our financial position is, what impact any particular storm has and whether or not we might need to borrow on a post-event basis because we’ve exhausted resources or whether we can cover the storm with the existing resources we have at our disposal,” Watkins said.

He said it’s always been the case that the Cat Fund has been able to cover claims from the storms, adding that these pre-event financings put the fund in a position to always be able to perform, having the money available to reimburse insurance companies for the losses they incur from homeowners’ policies.

In July, FIGA tapped the municipal bond market for the first time in more than 30 years, selling almost $600 million of tax-exempt fixed- and variable-rate bonds to help fund claims from insolvent insurance companies in the state.

FIGA was last in the market more than 30 years ago to help insurance companies deal with the devastation left by Hurricane Andrew in 1992. Andrew, which hit South Florida, ranked in the top five most powerful hurricanes to hit the U.S. The category 5 storm caused widespread death and destruction as it passed through Homestead and Cutler Bay in Miami-Dade County.

The state of Florida is rated triple-A by Moody’s, S&P and Fitch; all three assign stable outlooks to the state.

In 2023, Florida ranked fifth in the nation in state and local issuers who sold debt. The state and its municipalities sold $13.4 billion of bonds last year, down from 16% from $16 billion in 2022 when it ranked fourth.

Since 2019, the state has paid down almost one-quarter of its outstanding debt. The fiscal 2024-2025 budget recommends adding $455 million to the debt reduction program established by Gov. Ron DeSantis last year.

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