NU Online News Service

The Florida Hurricane Catastrophe Fund, a key reinsuranceprovider, has a shortfall of $18.5 billion, which could poseproblems for some of the state's recent insurance startups, stateofficials indicated.

Jack Nicholson, chief operating officer for the state fund, saidyesterday, prior to a briefing session with the State Senate Waysand Means Committee, that the fund under legislation approved lastyear is required to provide $29 billion in reinsurance, but may notbe able to meet that obligation under today's bond marketconditions.

In November of last year, Dublin, Ohio-based rating firm ofDemotech Inc. put insurers on notice that "the potential inability"of the Florida Hurricane Catastrophe Fund to honor claims adverselyaffects the ratings of carriers dependent on the reinsurance itprovides.

To extend ratings for such companies past May 15 will requiredefinitive word of full backing by the fund or documentation offinancing from "bridge loans or alternative financing mechanismsthat provide liquidity" while the fund is raising capital, saidDemotech President Joseph L. Petrelli in a letter he posted on thefirm Web site.

According to Florida Office of Insurance Regulation spokespersonEd Domansky, unlike most rating services, Demotech Inc. evaluatesinsurers that have been in business less than three years,providing ratings for most of the startup insurers who have begunoperations since the state was hit with big losses in 2005.

Without Demotech's Financial Stability Rating indicating theyare sound, the newer firms would be unable to operate, according toMr. Domansky.

Mr. Petrelli said at this point his firm, which has been inbusiness since 1985, rates about 62 Florida insurers, and since hisnotice was posted somewhere in the range of 30-to-40 percent of thefirms have provided documentation indicating they have adequatefinancial strength and the rest are in various states ofreview.

"Our hope is that things get resolved at the cat fund level,"said Mr. Petrelli. In the meantime, he said there are "variousopportunities for insurers to address a short-term liquidityissue."

He said he was surprised at the consternation his Novemberletter caused, and he had various meetings with officials of theOIR, the state Attorney General's Office and other departments toreassure that he was not taking precipitous action.

Mr. Domansky said they understood now that the letter was not athreat and noted that May 15 is the date when the legislature isdue to end its session and presumably find a solution to thestate's insurance woes.

Mr. Nicholson said the fund is currently healthy in terms ofliquidity. "We're rated 'double-A-minus'" [by Standard & Poor'sand Fitch] but would not be if the fund were to sustain $29 billionor $30 billion in losses.

He said by year's end, the fund expects to have $4 billion inpremium payments, 3.5 billion in notes and bond capacity forperhaps $3 billion, which adds up to $10.5 billion, or "$18.5billion short of our optimum level."

Demotech's possible action and the catastrophe fund's shortfallare a matter of concern to many in the industry like Henry K.Williams, a Marianna, Fla.-based State Farm agent.

Mr. Williams said via e-mail that the May 15 date posted byDemotech created a poignant question, since if the rating firm wereto pull the ratings of insurers then their customers would have tomake decisions 15 days before the start of the hurricaneseason.

He said state officials had made negative comments about StateFarm purchasing too much reinsurance, but "it seems to me, in lightof the situation with the FHCF and the intentions of Demotech, thatthey may not have been trying to buy enough."