Florida’s four hurricanes this summer resulted in record property damage, but they are not likely to damage credit quality.
In quick succession, Hurricanes Charley, Frances, Ivan and Jeanne attacked Florida, hitting both sides of the peninsula and the Panhandle. Estimates of property damages run in the $20+ billion range. If history is a guide, the impact on tax-exempt bond repayment and credit ratings should be minimal.
Mobile homes, private housing and businesses usually suffer the most, with insurance proceeds and federal aid available to pay for much of the rebuilding. Insurers of real property will see the greatest credit impact, although reinsurance by the Florida Hurricane Catastrophe Fund will mitigate these losses to a degree.
The fund, established following Hurricane Andrew in 1992, had net assets of $4.9 billion at June 30, 2003, and $9 billion in bonding authorization prior to the last two hurricanes. The state-run Citizens Property Insurance Company, which has both bonding and assessment capacity, also will absorb a portion of damage claims.
S&P reaffirms state’s GO rating
Despite this year’s record damages, little impact is expected for issuers of tax-exempt bonds. Already, Standard & Poor’s (S&P) reaffirmed the state of Florida’s general obligation rating at “AA+” at the end of September citing the possibility of short-term economic disruption while recognizing the state’s overall economic and financial strength.
Transportation bonds, such as those issued by the Santa Rosa Bay Bridge Authority or the Florida Turnpike Enterprise, are unlikely to see their ratings changed. In the case of Santa Rosa, the bridge is back in service after a short closure for limited damage. The state is responsible for repairs, maintenance and making up the shortfall of revenues due to the current moratorium on tolls. Other state transportation projects are covered by the same policy.
Our survey also reveals that health care issuers, such as Orlando Regional Medical Center, sustained minor damages and expect minimal financial impact. Once again, insurers will be on the hook.
Assuming this “freak” hurricane season will produce no further impacts on the Florida peninsula, it is likely that the state’s economy will feel the effects of the hurricanes, both negatively and positively. While substantial economic activity was reduced, rebuilding will provide a stimulus. The effect on bondholders is likely to be felt indirectly through a short-term slowdown in growth in assessed valuations. But general obligation bonds, which depend on property taxes for payment, are the strongest credit sector with multiple payment sources available.
S&P commented in 2002 that natural disasters rarely affect bond ratings since substantial resources from the federal government, local government rainy day funds and insurance typically make up for incurred losses. While Florida has had a season for the record book, we see no reason to differ with S&P’s conclusion.