Miscellaneous

STATE BOARD OF ADMINISTRATION
Departmental

NOTICE IS HEREBY GIVEN by the State Board of Administration (“the Board”) of its estimate of the borrowing capacity and the projected year-end (as of December 31, 2006) 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 October 1, 2006. The projected year-end balance on December 31, 2006, is estimated to be $978.3 million assuming no losses related to the 2006 hurricane season. The Fund’s estimated borrowing capacity, defined as the maximum amount that the Board is able 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 $14,021.7 million. 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 limit of $15 billion for that Contract Year. This limit is $15 billion for a Contract Year adjusted based upon the reported exposure from the prior Contract Year to reflect the percentage growth in exposure to the Fund for covered policies since 2004 provided the dollar growth in limit does not increase in any one year by an amount greater than the dollar growth in cash balance. Therefore, the Board’s obligation is to raise up to $14,021.7 million, rather than the total capacity determined by using all of the available 6 percent for year one or 10 percent overall emergency assessment capability.

This estimate is based on 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 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 the 6% emergency assessment 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 2.19x. This means that the revenue stream available to service the debt is 2.19 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 October 1, 2006. Many factors will impact the interest rates that will ultimately be used when the Board determines that bonds must be issued. It is impossible to predict with any certainty what those rates will be.

4)     In accordance with the requirements of Section 215.555(6)(a)2., Florida Statutes, the Board has completed the bond validation process. The circuit court hearing held on November 12, 1996, resulted in a favorable ruling. The validation was then immediately appealed to the Florida Supreme Court. The Florida Supreme Court ruled on September 18, 1997, that the bonds are valid.

5)     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.

6)     The Fund has issued bonds. On July 6, 2006, Series 2006A, in the amount of $1,350,025,000 in post-event revenue bonds were issued. On July 21, 2006, Series 2006B, in the amount of $2,800,000,000 in pre-event revenue 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 at the time of a catastrophic loss, the stability of the revenue stream and potential litigation.

2)     A more general uncertainty is the condition of the financial markets at the time the bonds are issued and the degree of familiarity of potential investors with the Fund.

3)     Another general uncertainty is the ability of the capital markets to absorb a bond issue of this magnitude at the time of the bond issuance.

As of October 1, 2006, the Board’s good faith estimate of its bonding capacity is $14,021.7 million to reach the current statutory upper limit of $15 billion (based on the Board’s projected year-end balance of $978.3 million). The Board recognizes the importance of this estimate and is committed to make every effort to assure its ability to issue up to $14,021.7 million in bonds, if and when the necessity arises.