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Florida Cat Fund Could Fall $10 Billion to $15 Billion Short
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| Copyright: | A.M. Best Company, Inc. | | Source: | BestWire Services | | Wordcount: | 687 |
While it is true the Gulf Coast is entering the final stretch of hurricane season, Florida keeps its fingers crossed with recent word that, because of recent global financial hardships, the state’s catastrophe fund could face a considerable shortfall.
The Florida Hurricane Catastrophe Fund, from which insurance companies operating in the state were strongly urged to purchase reinsurance, is heavily dependant on the sale of bonds to come up with the money it needs to reimburse these companies.
A meeting to discuss the fund’s bonding capacity revealed the FHCF is facing a bonding shortfall of between $10 billion and $15 billion as volatility in the credit markets will potentially make it even more difficult for the cat fund to raise capital through what would be one of the largest public debt offerings ever.
“Certainly, if we have a big event, it could be a problem,” said FHCF senior adviser Jack Nicholson. “We may need to go to the federal government but I don’t think that will be a problem. We aren’t like others who have received help from the government. Our credit remains good.
“No matter what, I have a strong feeling that we’ll be able to pay our losses,” he added.
A.M. Best Co. recently released a statement questioning impending liquidity and cash flow problems of companies that bought reinsurance from the FHCF. A.M. Best has started to “assess the impact on rated entities’ risk-adjusted capitalization based on the reduction in the potential coverage available from the FHCF,” the statement said.
“Given the overall importance of the FHCF in Florida property writers’ overall reinsurance structures and its contingent capital structure, A.M. Best believes this is the most prudent approach in the assignment of its ratings given these historic market dynamics,” A.M. Best said.
If Florida is lucky, the speculation surrounding the potential need to sell bonds will be moot. The majority of the hurricane season is over but the state still recalls Hurricane Wilma, which struck late October, 2005. Even so, Nicholson said the FHCF doesn’t have to go to bond right away.
“It could take months for claims to be processed,” he said, adding that it took about 40 weeks to pay out about $11 billion in claims caused by Wilma. “The crisis we are facing now could change by then.”
Nicholson said, for instance, that the FHCF issued bonds this year to pay claims from up to four years ago.
According to a FHCF report, the fund has about $10 billion of liquid assets – about $2.8 billion in surplus, about $3.5 billion in already borrowed money and $3 billion in bonds financial analysts are confident the fund can sell in today’s market.
“Let’s hope we get through this season and this is all just talk that will be a wake-up call for our legislature,” said Gary Landry, vice president of the Florida Insurance Council. “We’ve seen the problems. The financial picture has changed. Promise now and pay later may not be the greatest idea.”
Landry said the FHCF knew it was in trouble when in July it turned to Warren Buffett''s Berkshire Hathaway. The state paid Berkshire $224 million in return for the company''s promise to buy $4 billion in state bonds should a hurricane cause $16 billion in loss this year.
David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America, said the cat fund is the “backbone of the state’s property insurance system.” Limiting the state''s role as a direct insurer will take risk burden off of Florida taxpayers, who will ultimately be paying the price through assessments.
Putting some risk back into the private market was endorsed by Nicholson, Landry and the Reinsurance Association of America.
The state, when it expanded the FHCF to $28 billion in a move that officials said would ultimately lower homeowners rates, made a mistake, said Dennis Burke, vice president and director of state relations for the RAA.
“We would encourage the legislature to take advantage of the private market reinsurance capacity,” Burke said.
(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)
This is a news service of Thomson Business Intelligence Service ©2006. This content is for your personal use only, subject to Terms and Conditions. No redistribution allowed.
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