Florida is taking proactive measures to protect against future catastrophic events by coming to market early with a $1.5 billion taxable bond sale. The State Board of Administration Finance Corp. is planning to issue $1.5 billion of taxable revenue bonds in two maturities. Originally, the plan was to offer five-, seven-, and 10-year maturities, with $500 million in each tranche. However, after convening with the underwriting group, it was decided to just offer 5s and 10s – $500 million of five-year bonds and $1 billion of 10-year bonds. This strategic decision was made to secure longer-dated bonds with more permanence, providing a layer of liquidity for the state.
The proceeds from the bond sale will replace some of the $1.25 billion of bonds rolling off from the $3.5 billion 2020 CAT bond sale. Given the current interest-rate environment, which is approximately 300 basis points higher than when the state sold CAT bonds four years ago, the taxable deals are priced with the spread to Treasuries in mind. The price talk on the deal has been around 100 basis points over the comparable 10-year Treasury security, and slightly lower for the five-year bonds.
Rating and Management
Morgan Stanley is the senior bookrunning manager set to price the taxable Series 2024A revenue bonds, with BofA Securities, J.P. Morgan, and Wells Fargo serving as co-senior managers. The deal is highly rated by Moody’s Ratings and AA by S&P Global Ratings, Fitch Ratings, and Kroll Bond Rating Agency, all with a stable outlook on the credit. Proceeds from the bond sale will go to the CAT fund to make reimbursement payments to insurers for reimbursable losses caused by any future covered events.
The bonds are primarily secured by reimbursement premiums collected from nearly all residential property insurers in the state of Florida. The CAT fund serves as a crucial component of the state’s efforts to promote long-term stability in Florida’s residential property insurance marketplace. By providing a stable and ongoing source of loss reimbursement for residential property insurers, the CAT fund functions like a private reinsurer, collecting premiums and reimbursing insurers for covered residential losses.
Assessment Mechanism and Growth
The CAT fund’s assessment mechanism is designed to levy assessments on nearly all property and casualty insurance policies statewide. The fund’s broad assessment base, totaling $72.6 billion in 2022, has seen consistent growth due to the state’s population increase and rapid increases in insurance premiums. Assessments are levied on over 90% of property and casualty insurance premiums statewide, with specific percentages attributed to auto insurance, homeowner policies, and other lines. The fund’s assessment mechanism has been successfully tested and is expected to function even during the state’s recovery from a catastrophic event.
Florida’s decision to issue taxable bonds to bolster the Hurricane Catastrophe Fund is a strategic move to ensure financial protection against future disasters. With strong ratings and a stable outlook, coupled with a solid assessment mechanism and consistent growth, the CAT fund is well-positioned to provide ongoing support to insurers in the face of calamities. By taking proactive measures now, Florida is fortifying its resilience and stability in the residential property insurance marketplace.