Florida’s government-run insurance system has amassed record cash reserves as hurricanes bypassed the state since 2005. That hasn’t helped investors in its bonds, with some trailing benchmarks by the most since February.

Yields on debt issued by the state-run Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund Finance Corp. exceeded top-rated bonds with similar maturities by the most in six months in August.

That slump probably will persist as money drains from the $3.7 trillion municipal market, said Justin Land, who helps manage $3 billion of state and local debt at Naples, Florida- based Wasmer, Schroeder & Co. With yields reaching the highest since 2011 on bets the Federal Reserve will scale back its bond purchases, munis have lost about 6 percent since Feb. 1, more than double the declines on Treasuries and corporate borrowings, Bank of America Merrill Lynch data show.

“I would expect some higher rate spreads” amid broader losses in munis, said Land, whose firm holds hurricane bonds. The constant threat that a storm may strike the region also could foster concern that the bonds will suffer, he said.

Recalling Wilma

The last hurricane to make landfall in the state was Wilma in October 2005, and August passed without an Atlantic hurricane for the first time since 2002.

Colorado State University forecasters had predicted as of Aug. 2 an above-average probability of a U.S. and Caribbean “major hurricane landfall,” this season, which extends through November. There’s a 28 percent chance this year that Florida will be hit by a major storm with winds of at least 111 miles (179 kilometers) an hour, they said last month. That’s up from an average of 21 percent from 1950 to 2000.

Florida isn’t the only state that issues debt to hedge against natural disasters. Louisiana, North Carolina and Texas have government-run windstorm pools to provide insurance in high-risk areas. California has a state-run earthquake insurance system.

Citizens, whose policies cover homeowners and businesses, and the catastrophe fund, which helps other Florida insurers limit risk, were set up after Hurricane Andrew in 1992. One of the century’s most destructive storms, it did an estimated $26 billion in damage, mostly near Miami, leveling 49,000 homes and leaving at least 26 people dead, U.S. National Weather Service records show.

Cash Preparation

During an unprecedented streak in which no hurricanes made landfall in Florida, Citizens and the catastrophe fund built combined reserves of $16.6 billion as they borrowed to prepare for the next Andrew-sized storm and to avoid taking money from Floridians to refill their coffers.

Both agencies can levy charges on consumers after a storm to raise cash, if needed. State lawmakers have pushed them to increase reserves to avoid that step.

That has boosted borrowing by Citizens and the catastrophe fund. The insurer last sold tax-exempt hurricane bonds in June 2012, with a $1.3 billion offering, while the reinsurance agency raised $2 billion in April.

Tax-exempt Citizens bonds maturing in June 2021 traded Aug. 22 at an average yield of 3.82 percent, or about 1.2 percentage points more than benchmark debt, according to data compiled by Bloomberg that screens for trades of at least $1 million. That was the widest spread since at least February.

Largest Gap

Federally taxable bonds issued by the catastrophe fund that mature in July 2020 traded Aug. 21 with an average yield as high as about 4.4 percent, or about 2.2 percentage points above its benchmark, also using trades of at least $1 million. That’s the largest gap since the bonds were sold in April.

Hurricane bonds offer value because the threat of natural disasters in Florida isn’t correlated to other risks in the financial markets, Land said.

Citizens, Florida’s largest real-estate insurer, covers almost 20 percent of the state’s property. The Citizens bonds maturing in 2021 are rated A+ by Standard & Poor’s, its fifth- highest grade.

The $2 billion the catastrophe fund raised in April was its biggest offering since 2007, said Jack Nicholson, the agency’s director. That brought its reserves to about $11.8 billion.

“We’re in the best shape we’ve ever been in,” Nicholson said. “The only thing that would stress the Cat fund would be a major event, a once-in-100-years type storm.”

Sandy Example

Florida lawmakers have spent much of the past two years urging Citizens to prepare for a storm like Hurricane Sandy, which devastated coastal areas from New Jersey to Connecticut in October.

Last year, Citizens, which covers 1.2 million properties, also sold $750 million in catastrophe bonds into the corporate market to raise capital in case losses exceed a certain threshold. These bonds differ from the revenue-backed muni debt sold by Citizens, providing buyers with higher returns in exchange for risking a loss of principle.

Investors in the catastrophe bonds could lose the entire $750 million if a major hurricane hits Florida this year, Citizens documents show. If the reserve created by the sale goes untouched into 2014, investors will earn about 18 percent or more, according to Citizens. The insurer sold another $250 million in such securities in March.

Streak Survives

Florida’s hurricane-less streak going on eight seasons is the longest on record, according to 162 years of data collected by the National Hurricane Center in Miami.

From 1851 to 2004, 273 of the storms struck the U.S. mainland, according to the center. Florida led the lower 48 states with 110 making landfall, including 35 of Category 3 or stronger.

Florida is financially prepared for another storm like Andrew, Nicholson said. Even so, a direct hit on a major population center such as Miami or Tampa may cause much more damage than Andrew, he said. The 1992 category 5 hurricane struck near Homestead with winds estimated at 165 miles an hour.

“We’re in good shape, but that’s not to say things couldn’t get really bad in a hurry,” he said. “Hurricane season’s not even close to being over.”

In the nationwide market for new issues, municipalities plan to offer about $2.4 billion of bonds this week, which was shortened by yesterday’s Labor Day holiday.

The localities are selling with benchmark yields closed to a two-year high. At 3.09 percent, yields on benchmark 10-year munis compare with about 2.78 percent for similar-maturity Treasuries.

The ratio of the yields is about 111 percent, compared with an average of 93 percent since 2001. The greater the figure, the cheaper munis are relative to Treasuries.

With assistance from Brian Chappatta in New York and Brian Sullivan in Boston. Editors: Ted Bunker, Justin Blum, Mark Tannenbaum