[April 24, 2012]

Fitch Affirms Florida Hurricane Catastrophe Fund Finance Corp. at 'AA'

Fitch Ratings affirms the 'AA' rating on the following Florida Hurricane Catastrophe Fund (FHCF) Finance Corp bonds:

--$3.5 billion in pre-event floating rate notes, series 2007A;

--$1.6 billion in outstanding post-event bonds, series 2006A, 2008A, 2010A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by emergency assessments and reimbursement premiums, as well as investment income on unspent, pre-event bond proceeds. Primary security and rating are derived from FHCF's ability to levy emergency assessments on nearly every insurance policy holder in the state for as long as debt is outstanding. Assessments are subject to a 6% cap related to one year's loss and a 10% cap for cumulative years' losses.

KEY RATING DRIVERS

TAX-LIKE ASSESSMENT SECURES BONDS: The bonds are secured by emergency assessments levied on almost all property & casualty insurance policies in the State of Florida, a very stable source of revenue. The emergency assessment rate can be reset each year and is currently well below its statutory ceiling.

CURRENT LIQUIDITY STRONG: Financial position is improved following no catastrophe losses over the past six years and regulatory changes that reduced the FHCF's exposure and enhanced its ability to grow its fund balance.

EXPOSURE TO STATUTORY CHANGES: The credit profile of the FHCF is subject to legislative action that may affect the risk or size of its insurance exposure or the ability to grow its claims-paying resources.

FLORIDA INSURANCE MARKET REMAINS WEAK: The Florida insurance market continues to be somewhat unstable and vulnerable. Many larger, financially stronger insurers have either stopped writing new policies or are completely exiting the market, shifting the risk to the smaller, thinly capitalized, Florida-only insurers that are mostly unrated or low rated.

STATE HAS SOLID LONG-TERM ECONOMIC PROSPECTS: Long-term economic prospects are solid, although current economic performance remains weak. Economic fundamentals are strong with future growth expected; however, the housing market remains weak and the unemployment rate above average.

CREDIT PROFILE

The Florida Hurricane Catastrophe Fund (FHCF), a type of state-run property re-insurer, has statutory authority to levy assessments on policyholders in Florida following a large windstorm event to cover reimbursement claims or debt service on pre- and post-event bonds. The 'AA' rating reflects this access to special tax-like emergency assessments, as well as FHCF's stronger liquidity position after several years of limited hurricane activity and state involvement in ensuring the availability of property insurance in Florida.

The FHCF is a tax-exempt trust created by the State Legislature to improve the availability and affordability of residential property insurance in Florida following the extensive damage caused by Hurricane Andrew in 1992. FHCF provides reinsurance coverage to the approximately 169 residential property insurers doing business in the state, reimbursing insurers after their hurricane-related residential property insurance losses have reached their retention limit. Participation in the FHCF program is, with limited exceptions, mandatory for insurers writing residential property insurance in the state. Insurers may choose coverage of 45%, 75% or 90%, although most choose the maximum 90% rate, as the FHCF reportedly provides the most cost-effective reinsurance available relative to the private reinsurance market.

Ultimate security for the bonds is derived from FHCF's ability to levy 'emergency assessments' on nearly every insurance policy holder in the state for as long as debt is outstanding to pay debt service on the bonds. The emergency assessments are billed to policy holders through the insurance carriers, onthe same bill as their insurance premiums. Non-payment of the emergency assessment is grounds for cancellation of the policy, so collection rates are close to 100%.

The emergency assessment base, derived from the premiums written on property and casualty insurance policies in the state, is large and diverse and provides strong support for bondholders. The assessment is levied as a uniform percentage of up to 6% of that year's aggregate statewide direct written premium (DWP) on subject lines of insurance for losses in a single season, and up to a maximum of 10% for multi-year losses. The lines are very broad and include all property and casualty insurance, excluding only accident and health, workers' compensation and medical malpractice. As the Florida economy overall was hit very hard by the recession, the base declined from a high of $37.6 billion in 2006 to a low of $33.3 billion in 2009. The base has stabilized and at the current level of $33.6 billion it could generate up to $3.4 billion per year in support of debt service, or almost 9 times (x) maximum annual debt service on bonds currently outstanding.

The FHCF's reimbursement obligation is limited to the lesser of its annually set statutory limit or its claims paying resources. These consist of funds on hand at the beginning of the contract year, June 1, which also corresponds to the start of the hurricane season; reimbursement premiums collected over the course of the year; and its bonding capacity. For the current contract year, the FHCF provided a total of $18.4 billion in coverage. Claims paying resources consisted of approximately $7.2 billion in fund balance and $3.5 billion in pre-event notes that mature in October 2012 with the balance covered by bonding capacity. As FHCF approaches the 2012 hurricane season, its resources are expected to increase by approximately $1.3 billion in reimbursement premiums for the 2012 - 13 contract year but will be reduced by the maturing $3.5 billion in pre-event bonds.

As a reinsurer, FHCF's reimbursement obligation does not commence until an industry retention layer is met by the insurers. For the 2011 season, the retention layer was $7.4 billion, corresponding with the probability of a 1-in-9 year event. The need to issue additional bonds would have been triggered if industry losses exceeded $15 billion, a 1-in-17 year event. Industry losses would need to reach $31.7 billion for the FHCF's full exposure to have been realized, which corresponds to a 1-in-41 year event.

The FHCF's credit can be both positively and negatively affected by legislative actions as was seen in 2004 and 2005 when statutory changes significantly increased the FHCF's exposure, changes which were subsequently reversed or allowed to expire. The FHCF cannot file for bankruptcy and cannot be legally dissolved while it has debt outstanding. The state has also covenanted not to take any action that would impair the revenues securing the debt. Other bondholder protections include a 1.25x coverage additional bonds test; post-event bonds also require 1.0x coverage solely from emergency assessments. The FHCF must certify each year that secured revenues cover debt service on parity obligations by at least 1.25x, or else take corrective measures, such as raising the emergency assessment rate, to achieve this coverage.

The general obligation bonds of the state of Florida are rated 'AAA' with a negative outlook. Until the recession, the Florida economy was characterized by rapid growth, economic broadening, and diversification as it was transformed from a narrow base of agriculture and seasonal tourism into a service and trade economy, with substantial insurance, banking and export components. Strong underlying fundamentals remain, including a relatively low cost of living, attractive tourist and retirement destinations, and favorable geographic location; however, there is significant uncertainty regarding the near term economic outlook and economic performance during the recession was among the weakest of the states. The state's natural amenities include 2,200 miles of tidal shoreline, proximity to Latin American and Caribbean markets, some of the world's most popular tourist destinations, large convention venues, and major cruise ship ports.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Guidelines for Rating Assessment-Secured Debt Issued by State-Sponsored Property Insurers'

(Feb. 17, 2012);

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. State Government Tax- Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Guidelines for Rating Assessment-Secured Debt Issued by State-Sponsored Property Insurers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671549

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

[ Back To TMCnet.com's Homepage ]