Estimated Borrowing Capacity
NOTICE IS HEREBY GIVEN by the State Board of Administration of Florida (“the Board”) of its estimate of the borrowing capacity and the projected year-end (as of December 31, 2008) fund balance for the Florida Hurricane Catastrophe Fund (“the Fund”), in compliance with the requirements of Section 215.555(4)(c)2., Florida Statutes. This estimate is as of May 1, 2008. The projected year-end balance on December 31, 2008, is estimated to be $3,621,600,000 which represents available funds to pay losses during the 2008/2009 Contract Year. The Fund’s estimated borrowing capacity, defined as the amount that the Board will need to raise through the issuance of revenue bonds under Section 215.555(6), Florida Statutes, pursuant to the limitations in Section 215.555(4), Florida Statutes, is $25,508,400,000. The liability of the Board under the Act and the Reimbursement Contracts for payment of reimbursable losses under all Reimbursement Contracts for a Contract Year in which a Covered Event has occurred will not exceed the actual claims-paying capacity of the Fund, up to a maximum limit of $29,130,000,000 for that Contract Year. Given the projected year-end cash balance of $3,621,600,000, the Board estimates that if interest rates and the Fund’s credit ratings remain stable and if there are no unforeseen exogenous factors that impact the financial markets that the Fund’s estimated borrowing capacity is $25,508,400,000 given actual coverage selections by insurers for the 2008/2009 reimbursement contract year. This estimate is based upon the Board’s good faith assessment of the current global market conditions and is net of required debt service reserve funds and the costs of issuing the bonds. These conditions may or may not be the same if and when the Board determines that it is necessary to seek the issuance of revenue bonds. The Board’s estimate is also based upon projected year-end reimbursement premiums. Emergency assessments are based on the data available as of this estimate. This estimate is provided to comply with the requirements of Section 215.555(4)(c)2., Florida Statutes, and should only be relied upon after careful consideration of all relevant assumptions and reservations, including those set forth below.
Assumptions:
1) The Board assumes that both the annual reimbursement premiums and up to 6% emergency assessments as described in Section 215.555(6)(b)2., Florida Statutes, will be used as the revenue source to service the debt and to provide debt service coverage.
2) The debt service coverage ratio is assumed to be 1.73x, this means that the revenue stream available to service the debt is 1.73 times the amount actually needed to service the debt. The debt service coverage ratio is sensitive to actual reimbursement premiums collected during the year. Changes in deductible distributions and other factors that impact actual reimbursement premiums may impact the coverage ratio.
3) The Board has assumed interest rates reflecting market conditions on May 1, 2008. Many factors will impact the interest rates that will ultimately be used when the Board determines that bonds must be issued. It is not possible to predict the actual interest rate at the time of a bond issuance.
4) In response to the private letter ruling received in March 1998, and renewed on June 13, 2003, the Internal Revenue Service ruled that interest on the bonds issued under Section 215.555(6), Florida Statutes, is exempt from federal taxation.
5) The Fund has issued bonds. On July 6, 2006, Series 2006A, $1,350,025,000 in post-event revenue bonds were issued. On July 21, 2006, Series 2006B, $2,800,000,000 in pre-event extendable floating rate notes were issued. On October 3, 4, 5, 10, 12 and 15, 2007, a total of $3,500,000,000 in Series 2007A pre-event floating rate notes were issued.
Reservations:
1) If additional bonding is necessary, there are a number of uncertainties. Among these are the following: the financial condition of the insurance industry, the state, and the national economy at the time of a catastrophic loss. The stability of the revenue stream and potential litigation could adversely impact the Fund’s bonding capacity.
2) A more general uncertainty is the condition of the financial markets at the time the bonds are issued and the familiarity of investors with the Fund.
3) Another general uncertainty is the ability of the capital markets to absorb a bond issue of the magnitude that may be required at the time of the bond issuance.
4) On May 14, 2008, the Florida Hurricane Catastrophe Fund Advisory Council members noted that they continue to be uncomfortable with the increased funding levels of the Fund since the enactment of CS/HB 1A in January 2007. This heightened level of concern stems from the recent increased volatility in the financial markets, coupled with the additional uncertainty brought about by the financial market conditions evidenced since August 2007 associated with the sub-prime mortgage problem and the continuing impact on financial market liquidity. It is the Advisory Council’s considered opinion that the additional capacity offered by the Fund should be reduced legislatively to a level which can be financed with greater certainty. The Advisory Council cautions that a large hurricane combined with unfavorable financial market conditions could result in liquidity issues, slower payments to insurers and a significant subsequent season shortfall in anticipated Fund capacity.
