SBA Meeting Report: FHCF to Purchase $4 Billion of Its Own Tax-Exempt Bonds Through Put Option

A special meeting of the Florida State Board of Administration (“SBA”) and the Florida Hurricane Catastrophe Fund Financing Corporation was held this morning, July 2, 2008, to discuss the purchase of financial products for the Florida Hurricane Catastrophe Fund (“FHCF”). 

The SBA is comprised of Governor Charlie Crist as Chairman, Chief Financial Officer Alex Sink as Treasurer and Attorney General Bill McCollum as Secretary. 

The Florida Hurricane Catastrophe Fund Financing Corporation is comprised of Governor Crist, Chair; CFO Sink; Attorney General McCollum; J. Ben Watkins, III and Jack E. Nicholson, President.

Attorney General Bill McCollum attended the meeting via teleconference.

To view the meeting agendas, click here.

Summary

The SBA approved a proposal to authorize the FHCF Finance Corporation to engage in a financial transaction for the provision of additional funding to the FHCF.  The transaction approved was a $4 billion “put option” that would be available in the event that major storm(s) trigger the Temporary Increase in Coverage Limits (“TICL”) layer of FHCF coverage. 

The SBA voted 2-1 to revise the 2008-2009 FHCF Premium Formula to reflect the cost of this financial product.  Governor Charlie Crist, however, voted “no” because he felt that this proposal would increase insurance rates.  A question then arose as to whether this item required unanimous approval.  It was discussed that if a unanimous vote is required, then the item will be considered to have failed, and the FHCF will not be authorized to change its premium formula.  However, this issue will be further reviewed by legal counsel.

Report

The following SBA agenda items were considered:

State Board of Adminstration

1. Request approval for the FHCF to purchase financial products in order to enhance its ability to respond to participating insurers’ losses for the 2008/2009 reimbursement contract year
a. Reinsurance Product Consideration
b. Request approval to authorize the Florida Hurricane Catastrophe Fund Finance Corporation to engage in financial transactions to provide additional funding to the FHCF
c. Request approval to revise the 2008/2009 Florida Hurricane Catastrophe Fund Premium Formula and the 2008 Rates to reflect the cost of financial products (a) and/or (b) above
d. Request authority to amend the Florida Hurricane Catastrophe Fund budget for the purpose of including the cost of the financial products in (a) and/or (b) above
 
SBA Interim Executive Director General Bob Milligan presented the proposals and recognized financial advisor John Forney to discuss the two funding options.

Mr. Forney reported that with $8 billion in usable cash available, the FHCF is in the best financial shape in its history.  However, despite that strength, concerns exist regarding the FHCF’s increased exposure and the extremely distressed state of the financial markets.  According to Mr. Forney, given appropriate time, the FHCF could find bonding capacity, but the prudent approach for 2008 is to consider other funding options.

The FHCF Financing Team (banking, reinsurance and legal experts) met and considered solutions for potential funding gaps.  The biggest concerns addressed in their meetings were the uncertainty of the financial markets and funding for TICL coverage.

All financial products were considered in developing solutions based on four criteria: fitness, capacity, executability and price. 

Mr. Forney addressed two financial options during the meeting: 1) risk transfer and 2) liquidity.  The risk transfer option (i.e.: reinsurance) eliminates the need for additional funding.  However, according to Mr. Forney, that option is significantly more expensive than other alternatives.  He reported that traditional reinsurance would be the best product to meet this need, and that a rate on-line of 17-24 percent is available.  The liquidity options discussed included a customized tax-exempt “put option” product and traditional pre-event bonds.

Mr. Forney stated that the “put option” meets the four criteria better than the other options.  However, he noted that it was not a perfect fit.  In this instance, Berkshire Hathaway has offered to buy $4-5 billion worth of bond options at 5.6 percent of the par amount if the TICL layer of the FHCF is triggered.  A commitment to purchase $4 billion in bonds would cost $224 million. 

Fulfilling potential FHCF obligations through traditional pre-event bonds is considered difficult.  However, Mr. Forney noted that achieving $1-2 billion in bond funding is possible.

After the presentation, a lively discussion ensued that included comments regarding federal assistance, the failure of the Legislature to reduce the FHCF exposure, potential loss and assessment scenarios, and availability of reinsurance solutions.

Following discussion, a motion by Governor Crist to approve the proposal to authorize the FHCF Finance Corporation to engage in the $4 billion “put option” was adopted unanimously. 

Next, as noted in the summary above, the SBA voted 2-1 to revise the 2008-2009 FHCF Premium Formula to reflect the cost of the put option. 

Other agenda items:

• A motion to direct the development of a resolution authorizing the Florida Hurricane Catastrophe Fund Finance Corporation to provide additional funding to the FHCF was approved without discussion.

• A motion by CFO Sink to authorize General Milligan to negotiate with Ash Williams to become permanent SBA executive director was approved unanimously.

FHCF Financing Corporation

The FHCF Financing Corporation met briefly to approve the following agenda item without discussion.

Agenda Item 1–Direct the development of a resolution authorizing the Florida Hurricane Catastrophe Fund Finance Corporation to provide additional funding to the FHCF.

This item was necessary to authorize the FHCF Financing Corporation to formalize the $4 billion “put option” agreement.

There being no further business, the meeting adjourned. 

The memorandum submitted by Raymond James to the SBA is enclosed for your review.

 

Should you have specific questions or comments regarding the above matter, please feel free to contact this office.

 

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