|[April 24, 2012]
Fitch Affirms Florida Hurricane Catastrophe Fund Finance Corp. at 'AA'
NEW YORK --(Business Wire)--
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,
The Rating Outlook is Stable.
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'
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
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
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
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.
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
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
Tax-Supported Rating Criteria
U.S. State Government Tax-Supported Rating Criteria
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.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
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