ATLANTA -- Florida's Legislature yesterday began considering a bill to make possible the sale of about $500 million of tax-exempt revenue bonds to pay off claims on insurers forced into liquidation by Hurricane Andrew.
The financing, which would be sold by Homestead, Fla., would bolster the reserves of the Florida Insurance Guaranty Association, a private nonprofit group that covers such claims but is now running out of reserves, said Insurance Commissioner Tom Gallagher.
"There are about 16,000 people in the state that need to be paid on insurance policies, but haven't been because of the insolvencies due to the hurricane," Gallagher said in an interview yesterday.
"The legislation would allow rebuilding of [the association] so it could make payment in the least disruptive manner," he added. Gallagher is also Florida's state treasurer.
Hurricane Andrew struck on Aug. 24, causing an estimated $20 billion in damage to South Florida.
The bill, introduced yesterday at the start of a special three-day session focusing on hurricane relief, would permit the insurance association to increase to 4% from 2% the charge it levies on property and casually insurance policies sold in Florida.
The added income, which Gallagher estimates would total about $70 million a year, would be used to pay debt service on the approximately $500 million issue.
Although Homestead would issue the debt, it would not pledge its own funds or taxing powers to the financing, Gallagher said.
If the state Legislature approves the bill this week, the bond issue would be sold as soon as possible, and maybe before Christmas, Gallagher said. He said he expects a senior underwriting team to be chosen by the end of the week.
Kathy Putnam, spokesman to Rep. Bo Johnson, D-Milton, speaker of Florida's House of Representatives, said prospects for passage of the legislation appear favorable.
"There is a feeling among the leadership that something has to be done about the insurance fund," she said.
The exact amount of debt sold would depend on the total claims that policyholders make on insurers forced into insolvency by Hurricane Andrew, Gallagher said.
He estimates the association will eventually be presented with $500 million of claims. So far, he noted, six insurers in the state have been forced into liquidation because of Andrew.
The proposed legislation does not stipulate a limit on the amount of bonds that could be issued or a termination date for collecting the surcharge. Proceeds from the borrowing could be used only to pay claims on an insurance company whose insolvency is due to Hurricane Andrew, as determined by the insurance association board.
Gallagher said he is confident the tax-exempt status of the prospective financing would not be challenged.
"There can be no doubt that [the deal] would serve a major public purpose because of the number of people that have been involved [in the nonpayment of insurance policies] and the effect of that on the state's economy," he said.
A list of 18 prospective senior managers for the financing has been narrowed to four, according to Cliff Hinkle, special consultant to the insurance association. Hinkle said that oral interviews of the four -- Bear, Stearns & Co.; Kidder, Peabody & Co.; Lehman Brothers; and Smith Barney, Harris Upham & Co. -- would be held today and a bookrunning manager would be chosen at that time.
Coleman W. Cordell, a vice president in public finance at Morgan Stanley & Co., financial adviser to issuer, said Homestead is the "natural" issuer for the bonds because of the extent of hurricane damage suffered by its residents.
The insurance association was rejected as a potential issuer, he added, because it would not have been able to sell tax-exempt debt. Florida is prohibited by its constitution from selling debt that does not involve a capital expenditure, he said.
"We are very pleased to be the issuer because payment of the insurance policies is extremely important for our home owners, who need reimbursement to rebuild," said Horacio A. Montes De Oca, Homestead's director of finance.
Hinkle said bond insurance or a letter of credit may be sought for the financing. "This will be an economic decision," he said, noting that discussions have been initiated with the rating agencies.
Officials at both Standard & Poor's Corp. and Moody's Investors Service said they are aware the insurance fund deal is in the works.
"If we are asked to rate the issue, our analysis would key in on the ability of the assessment surcharge levied [by the insurance association] to generate a stable stream of revenues," said Rene Boicourt, a Moody's vice president.
Jon Reichert, a director at Standard & Poor's said his agency would also focus on the reliability of the surcharge revenues if asked for a rating.
The insurance association has estimated that without an increase in its assessment rates, it will collect about $91.3 million in 1992. This includes $19.8 million from a 0.005% charge levied on auto liability premiums and $4.0 million from a 0.0025% charge on auto physical damage. The remaining $67.5 million is derived from the 2% charge levied on all other policies.
Homestead's bond issue would not be the first tax-exempt debt to replenish a state insurance guaranty fund.
In September 1990, the Louisiana Public Facilities Authority sold $50 million of bonds to shore up the Louisiana Insurance Guaranty Association after it was deluged by claims following the collapse of Champion Insurance Co. Champion went into liquidation in 1989 amid allegations of fraud.
Florida's special legislative session will also decide how to handle the potential $180 million in surplus sales tax revenues that state officials expect to collect as storm victims spend their insurance payments, Putnam said. Several local governments in Florida, including Homestead, have asked for a portion of those funds, she said.