Florida has decided to enter the market early this week with a $1.5 billion taxable bond sale to bolster the state’s Hurricane Catastrophe Fund. The State Board of Administration Finance Corp. is gearing up to issue $1.5 billion worth 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, the decision was made to offer $500 million of five-year bonds and $1 billion of 10-year year bonds instead. This shift was driven by the state’s desire for longer-dated bonds to provide more liquidity and stability.
The proceeds from this bond sale will serve to replace some of the $1.25 billion in bonds that will be rolling off from the $3.5 billion 2020 CAT bond sale. The current interest rate environment is around 300 basis points higher than when the state initially sold CAT bonds four years ago. Taxable deals like this one are priced with the spread to Treasuries in mind. The pricing for this deal has been set at about 100 basis points over the comparable 10-year Treasury security, and slightly lower for the five-year bonds.
Morgan Stanley will be the senior bookrunning manager for the bond sale, with BofA Securities, J.P. Morgan, and Wells Fargo acting as co-senior managers. Raymond James will serve as the financial advisor, while Nabors, Giblin & Nickerson will be the bond counsel. The credit rating for this bond sale is Aa3 by Moody’s Ratings and AA by S&P Global Ratings, Fitch Ratings, and Kroll Bond Rating Agency, with all four agencies maintaining a stable outlook on the credit.
The proceeds from this bond sale will be directed towards the CAT fund to make reimbursement payments to insurers for reimbursable losses caused by future covered events. The bonds are primarily secured by reimbursement premiums collected from residential property insurers in the state of Florida. This fund’s key function is to provide a stable source of loss reimbursement for residential property insurers, promoting stability in Florida’s residential property insurance marketplace.
This bond sale marks the first time that Kroll Bond Rating Agency (KBRA) has rated the credit. KBRA’s AA rating highlights the CAT fund’s robust debt repayment capabilities, which stem from its ability to levy assessments on nearly all property and casualty insurance policies statewide. Assessments may be charged directly to policyholders and can be collected for as long as bonds are outstanding. KBRA underscored the fund’s consistent growth in its assessment base, linking it to the state’s population growth and increases in insurance premiums.
KBRA emphasized that the fund’s assessment mechanism has been successfully tried and tested from fiscal 2007 through fiscal 2015. These assessments are enforceable and can be levied without legislative approval for the duration of the bond term. Assessments can reach up to 6% of annual premiums for losses linked to a single year, with a 10% cap for aggregate assessments stemming from storm losses over multiple years.
The $1.5 billion taxable bond sale by Florida for the Hurricane Catastrophe Fund serves as a crucial financial tool to enhance the state’s resilience against future catastrophic events. This bond sale not only bolsters the CAT fund but also highlights the state’s commitment to long-term stability in its residential property insurance marketplace.