Florida Cat Fund Can Handle Recent Loss, Chairman Says

Florida’s Hurricane Catastrophe Fund has taken a hit from the economic meltdown of the past few weeks, but its chairman said the fund can and will meet its current obligations.

At a meeting with its financial advisors on Tuesday, the fund’s Advisory Council was told that its total reimbursement capacity was estimated at $13.2 billion for a 12-month period and $11.8 billion if bonding were limited to a six-month period.

These numbers, according to the fund, represent a $10-to-$15 billion shortfall from the theoretical capacity needed for a maximum loss year.

The fund blamed some of its problems on the current liquidity crisis and its affects on the financial markets, as well as its own investment losses.

Additionally, it noted a decrease in its assessment base as well as the expense of an arrangement with Warren Buffet’s Berkshire Hathaway in which the fund paid for a guarantee that Berkshire would buy $4 billion in bonds if the fund’s losses exceeded $25 billion.

“Just like many businesses all over the world, the FHCF is impacted by the current financial market turmoil,” said Jack Nicholson, the fund’s chief operating officer.

Mr. Nicholson commented, “If a large event occurs, the fund would not have to pay claims all at once. It likely would take six to nine months to receive and pay about 90 percent of our claims and three to five years to receive and pay the rest.

“Our current cash resources can take us a long way. The fund currently has adequate resources, funding and liquidity to meet any existing bonding obligations.”

On the positive side, the fund has a strong liquidity position with $2.8 billion in year-end cash for the payment of claims, and another $3.5 billion in five-year floating rate notes totaling $6.3 billion, according to the advisors report.

Given the fund’s condition, David Sampson, president and chief executive officer of the Property Casualty Insurers Association of America, said that lawmakers in the state should pay heed to the threat posed to the state and its taxpayers.

"The Florida Catastrophe Fund is the backbone of the state's property insurance system,” he said. "The current financial crisis plaguing the nation directly impacts the cat fund's ability to pay claims. Whatever post-storm costs that the state cannot access in the bond market, taxpayers will be on the hook for through assessments on their property and auto insurance bills.”

Meanwhile, A.M. Best Co. said that based on the considerable credit market contraction and recently announced revision in the Fund’s claims-paying capacity, the rating firm is “concerned with the contingent capital nature of the FHCF.”

Potential liquidity and cash flow issues that might arise from a severe hurricane “create an additional level of uncertainty. Based on current market conditions, it is only prudent to re-evaluate these expectations in the assignment of ratings, despite the near completion of the 2008 hurricane season. With the 2007 implementation of the Temporary Increase in Coverage Limits, the FHCF increased its overall exposure considerably.

Best said it has begun to assess the impact on rated entities’ risk-adjusted capitalization based on the reduction in the potential coverage available from the FHCF. This assessment is based on both the revised claims paying capacity recently released as well as Best’s analytical judgment regarding the amount of capital that could realistically be raised in today’s volatile capital markets, Best said.

It noted that companies with significant potential gaps in reinsurance coverage and correspondingly inadequate risk-adjusted capitalization will be placed under review with negative implications pending additional discussions with company management regarding improving this key metric.

Best said it recognizes that not all FHCF funding will be required immediately and could conceivably be spread over time.

Best said it will continue to evaluate the amount of credit given to the FHCF in the context of both standard and stress-tested risk-adjusted capitalization through its proprietary capital model—Best’s Capital Adequacy Ratio (BCAR). This assessment will be based on both the stated claims paying ability of the FHCF as well as Best’s analytical judgment in terms of capital raising capability.