The authorized bonding program of the Florida Hurricane Catastrophe Fund (FHCF) has been upgraded to ‘AA’ from ‘A+’.
The FHCF provides reinsurance coverage of up to $15 billion per hurricane season, reimbursing insurers after hurricane-related residential property insurance losses have reached the deductible, currently $4.5 billion. If claims exceed the FHCF’s fund balance, revenue bonds are issued by the FHCF Finance Corp. to pay the difference. No bonds have been issued to date. The FHCF’s obligations under its reimbursement contracts are limited to the extent of its invested fund balance and its maximum bonding capacity.
Bonds issued would be secured by emergency assessments and reimbursement premiums. Emergency assessments have never been levied but would be required if the FHCF’s available funds were insufficient to reimburse eligible insured losses. Reimbursement premiums are collected by the FHCF every year, based on the risk in the insurer’s residential homeowners’ policies. Both sources are paid by the insurers but may be passed through directly to policyholders. Participation in the FHCF is mandatory for the 229 residential property insurers doing business in Florida.
The first time that bonds are issued, emergency assessments may be levied up to 6% of the prior year’s direct written premiums for all property and casualty insurance written in Florida, excluding malpractice insurance for three years and workers’ compensation and health and accident insurance. Assessments on subsequent season coverage are also limited to 6% of the above premium base, per season, but total assessments for all outstanding bonds may not exceed 10% of the premium base. Once bonds are issued, assessments must be levied to cover at least 1.25x maximum annual debt service. An additional bonds test requires all secured revenue to cover at least 1.5x maximum annual debt service.
The FHCF has grown stronger since it was first rated by Fitch in 1997. Through annual reimbursement premiums and investment earnings, the fund balance has grown from $1.6 billion at June 30, 1997 to a projected $6.15 billion by Dec. 31, 2004. The FHCF’s annual claims-paying capacity was capped starting in 1999 at $11 billion. The cap was increased to $15 billion for the 2004 hurricane season and will be increased in the future to accommodate exposure growth.
The capacity limit and growth in the FHCF’s internal resources means that if the maximum-sized bond is issued ($8.85 billion in 2004), emergency assessments of only 2.27% of the assessable premium base would be required to pay debt service. Importantly, there would still be $15 billion of capacity remaining for subsequent season protection. By contrast, had the then maximum-bond size of about $5.5 billion been issued in 1997, the FHCF would have essentially been out of capacity for future years.
An additional improvement in credit since 1997 is the increase in emergency assessment authority from 4% to 6% per year and from 6% to 10% in aggregate.
The FHCF was established in a special session of the Florida Legislature in November 1993 in response to hurricane Andrew.
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