Florida Citizens sells $900 million for hurricanes: Muni credit

, Daily Business Review

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Citizens Property Insurance Corp., Florida’s largest real-estate insurer, is offering $900 million in tax-exempt bonds beginning tomorrow, as yields on existing debt increased after forecasters predicted the risk of a major hurricane is 62 percent higher than in a normal year.
 
“There are always concerns about how badly Florida is going to be hit by hurricanes and they’re selling in June when that fear is heightened,” said Terry O’Grady, senior vice president of municipal trading at FMS Bonds Inc. in North Miami Beach, who plans to invest in the securities. That’s likely to make them a good buy, he said. “They always rally after.”
 
The yield on the state-owned insurer’s A+ rated bonds issued in March 2010 and due in 2016 increased 0.86 percentage point from the June 1 start of the hurricane season to June 22, according to data compiled by Bloomberg. The spread between them and an index of A+ rated five-year general-obligation debt widened 0.90 points to 1.88 points in the same period.
 
Florida’s chance of being hit by a hurricane with winds of at least 111 miles (179 kilometers) an hour is 34 percent, compared with a 21 percent 50-year average, researchers at Colorado State University’s Atmospheric Science Department said in a June 1 report. The state’s risk of being hit by a hurricane of any type is almost 3-in-4, compared with a 2-in-4 likelihood in a normal year.
 
Citizens’ was formed in 1993 to cover homeowners who can’t obtain coverage from an insurance company after $20 billion of damage from Hurricane Andrew prompted some companies to stop writing new policies.
 
The bonds issued tomorrow will fund claims for storm damage.
 
Travelers Comparison
 
Citizens’ tax-exempt debt due June 2016 traded June 22 at an average yield of 4.06 percent. By contrast, a taxable five- year corporate bond issued by Travelers Cos., ranked two levels lower at A- and maturing at the same time, traded at a yield of 2.56 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s about 1.67 percent in after-tax yield for investors in the top federal bracket.
 
Citizens’ has $2.7 billion in its coastal account, which was formerly called its high-risk account, according to a June 16 Citizen’s presentation. That, along with reimbursements from the Florida Hurricane Catastrophe Fund, the state’s reinsurer, are enough to pay for a storm so severe it would likely strike only once every 25 years, according to the presentation. A hurricane which would hit only once every 50 years would require the insurer to levy emergency assessments from insurance holders in the state.
 
‘Substantial’ Claims
 
Citizens hasn’t had to pay out “substantial” claims related to any storm since 2005, the most-active season on record, when Hurricanes Wilma, Katrina, Rita and Dennis struck the state, causing $10 billion in insured property losses including $2.2 billion covered by Citizens’ Coastal Account, according to offering documents.
 
Proceeds from the issue will be used to provide cash-flow for this storm season, after $750 million of outstanding debt matured during the past few months, said Sharon Binnon, Citizens’ chief financial officer, in an e-mail.
 
Underwriters led by Citigroup Inc. are marketing the issue, which may include short-term notes as well as floating-rate securities. The bonds are rated A2, sixth-highest by Moody’s Investors Service; and at A+, fifth-highest, by Standard & Poor’s and Fitch Ratings. S&P has a negative outlook on the debt.
 
‘Tax-Like’
 
“While three counties in South Florida account for over 30 percent of the state’s residential property exposure risk, policyholders in all of Florida’s counties would be assessed on their various lines of insurance in the wake of a significant hurricane,” said Moody’s in a June 9 report. “This makes the regular and emergency assessments tax-like in nature.”
 
In addition to the typical financial risks, investors must also price in the chance of legislative changes, said Michael Schroeder, president of Wasmer, Schroeder & Co. in Naples, Florida, which holds the debt.
 
“This is a program that has a risk of evolving,” he said in a telephone interview, especially if Florida’s private insurance market ever gets “cranked up” again.
 
A legislative change more than tripled the size of Citizens’ assessment base in 2007. Another, passed this year, shortens the amount of time policyholders have to file claims to three years from five.
 
Following are descriptions of pending sales of U.S. municipal debt:
 
PUERTO RICO, the Caribbean U.S. commonwealth, will offer $304 million in tax-exempts as soon as today for its Public Improvements Fund. The bonds aren’t yet rated, but the issuer is ranked A3, the fourth-lowest investment grade, by Moody’s, and BBB, the second-lowest investment grade, by Fitch. JPMorgan Chase & Co. will lead the sale. (Added June 24)
 
NEW YORK TOBACCO SETTLEMENT FINANCING CORP., which issues bonds funded by annual payments from cigarette makers, will sell $975.5 million in asset-backed revenue bonds as soon as tomorrow to refund 2003 securities, according to Fitch. The debt is rated AA-, the fourth-highest investment grade, by Fitch based on the outlook for New York state finances. Barclays Plc will lead the sale. (Updated June 24)
 

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