Florida Outperforms as Hurricane Forecast Improves: Muni Credit

Florida Outperforms as Hurricane Forecast Improves
No hurricane has made landfall in Florida since 2005, and investors such as Michael Schroeder at Wasmer, Schroeder & Co. said they’re adequately compensated for the risk as the season gets under way June 1. Photographer: Richard Sheinwald/ Bloomberg

With the Atlantic hurricane season days away, bonds of Florida’s largest real-estate insurer are rallying the most in nine months as forecasters assess a below-average chance the state will be hit by a major storm.

Buyers are demanding the smallest yield penalty since August on tax-exempt debt from state-owned Citizens Property Insurance Corp. No hurricane has made landfall in Florida since 2005, and investors such as Michael Schroeder at Wasmer, Schroeder & Co. said they’re adequately compensated for the risk as the season gets under way June 1.

Schroeder said Citizens and the Florida Hurricane Catastrophe Fund, which sells protection to every in-state insurer, will be able to finance cleanup costs through municipal debt and policyholder fees. Citizens plans to sell as much as $1.5 billion of bonds next month to boost reserves, and the fund is also considering a sale.

“The state continues to be supportive of these programs, because they have to,” Schroeder, president of Naples, Florida-based Wasmer, which manages $4.3 billion, said in an interview.

“Most of the heavy population centers are on the coast,” said Schroeder, whose firm owns Citizens debt. “If you don’t have a mechanism for supporting the ability to insure property, then you don’t have an economy.”

Bond Gains

The gains in the Citizens securities, which have the sixth-highest investment-grade rating from Moody’s Investors Service, show the risks investors are willing to take to boost returns as municipal yields remain close to four-decade lows.

A Citizens bond maturing in June 2017 yields about 2.4 percent, or about 1.6 percentage points above AAA debt, Bloomberg BVAL data show. The 10-day average of the yield gap is the smallest since August. Securities due in 2013 and 2019 have also strengthened relative to benchmark debt in that period, BVAL data show.

The Citizens board has authorized a municipal debt sale, a deal Chief Financial Officer Sharon Binnun said may be sold by the end of June. Jack Nicholson, director of the state-run catastrophe fund, said he will ask Governor Rick Scott and other trustees next month for clearance to sell at least $1.8 billion in bonds.

Scott, a 59-year-old Republican who prepares for storms by storing a full set of roof tiles for his Naples beachfront home, said the state’s financial cushion may be insufficient.

‘Not Comfortable’

Citizens has a $12 billion surplus with as much as $510 billion at risk, he said. The catastrophe fund, which backstops Citizens and every other Florida insurer, has $17.3 billion in obligations, more than double its cash on hand.

“I’m not comfortable that they can borrow the money that they would have to borrow,” Scott said about the catastrophe fund in a May 3 interview in his Tallahassee office. “There’s risk there.”

Nicholson estimates his fund will have $8.5 billion in cash by the end of 2012. That means it may need to borrow as much as $8.8 billion if it were required to meet all its obligations.

Investors would probably only buy $7 billion in bonds from the fund after a major storm, Kapil Bhatia, director of public finance for Raymond James & Associates, said in an interview. The St. Petersburg, Florida-based company prepared the estimates for the fund.

For Florida, the fourth-most populous state, the benchmark of destruction is Hurricane Andrew. The storm struck in 1992 as a Category 5, the most powerful intensity, according to the National Hurricane Center. It caused about $46 billion in damage in the U.S., according to an inflation-adjusted NHC estimate.

Category 3

This year, there is a 16 percent chance a Category 3 hurricane, with winds of at least 111 miles per hour (179 kph), will hit Florida, Colorado State University researchers forecast in April. That’s down from 21 percent in an average year.

The state doesn’t backstop Citizens or the catastrophe fund. Both can add fees to private policyholders to help pay for debt.

The fund was created after Andrew as an incentive for insurers to sell policies in the state. To drive down insurance prices after a combined eight hurricanes made landfall in Florida in 2004 and 2005, lawmakers in 2007 expanded the fund and let Citizens compete with the private market.

Citizens, which had insured only the riskiest properties, now has 1.45 million policies, about 33 percent more than in 2008 and about 150 percent more than Universal Property & Casualty, the second-biggest insurer in Florida. The amount of potential claims Citizens faces has grown 25 percent since 2009.

Cat Bond

This year, Citizens struck a deal for its first catastrophe bond. If a major storm hits the state, investors would lose $750 million, the largest such bond ever rated by Standard & Poor’s, said Gary Martucci, an analyst at the company. If not, the bonds, rated four levels below investment grade, will yield 17.75 percent. That’s a lower rate than what Citizens paid last year in the re-insurance market, Binnun said.

“If we have no storm, that’s their rate of return and it’s a great investment,” Binnun said. If a storm triggers the bond, “they would pay $750 million and take a fairly sporty loss,” she said.

Following is a pending sale:

VIRGINIA TRANSPORTATION BOARD plans to borrow $600 million of revenue debt as soon as this month via competitive bid. Proceeds will help finance capital projects, according to documents from the board’s April 18 meeting. (Updated May 23)

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