Despite recent attempts to stabilize its financial health,questions remain about the state's backup insurance fund's abilityto pay off claims in the event of a major storm in the comingmonths. While the financial outlook for the Florida HurricaneCatastrophe Fund (Cat Fund) has improved since last fall, itsadvisory council has concluded that it still cannot meet all of itsobligations.

The state-created reinsurance fund can probably borrow up to $8billion to cover claims, leaving it with a potential shortfall of$11.5 billion. The fund, which provides low-cost reinsurance toprivate carriers and to Citizens Property Insurance Corp., isexpected to have exposure of close to $28 billion during thisyear's hurricane season.

"There is still a significant amount of uncertainty that the CatFund would face in the financial markets after a large event,'"said John Forney, the fund's financial advisor from Raymond James& Associates.

The new bonding estimates released in May mean that the Cat Fundprobably has nearly enough to cover the claims associated with themandatory layer of coverage that all carriers in Florida mustpurchase in order to sell homeowners' policies. The $8 billionborrowing estimate is significantly better than the sobering $3billion estimate from last October, when the nation's creditmarkets were severely tightened.

But right now the Cat Fund is still projecting that it could notcover any claims associated with the highest layer of exposureknown as the Temporary Increase in Coverage Limit (TICL). Thisoptional $12 billion layer was created in 2007 by lawmakers in aneffort to bring down insurance rates.

Citizens, the state's largest property insurance carrier withmore than 1.03 million policies, has already said it plans topurchase coverage from this layer of reinsurance for the upcominghurricane season because private reinsurance is too expensive.

Cat Fund financial advisors have tried to downplay the risk withthe shortfall, stressing that they have as much as $8 billion incash and pre-event bonds that can be used to pay off initialclaims. They also point out that it would take a storm the size ofHurricane Katrina or Hurricane Andrew in order to trigger the kindsof huge losses that would require the fund to go out and borrow themoney. "It is still not a walk in the park, but things areimproving," said Jack Nicholson, chief operating officer of the CatFund.

Forney said he has grown tired of what he calls "Cat Fundbashing" that ignores the fact that the fund's ability to recovermoney through assessments gives it a good way to eventually payclaims. "It is an unfair extrapolation to say that is an indictmentof the entire Cat Fund," said Forney of the shortfall. "The onething that has not changed with regard to the Cat Fund is thefundamental strength of its credit and its ability to repay bondholders."

Sink Disagrees

But Chief Financial Officer Alex Sink — who has warnedrepeatedly about the need to scale back the state's risksassociated with the Cat Fund — is not as optimistic. She noted thatthe revised $8 billion bonding estimates only hold up if the stateagrees to pay interest rates that could exceed 10 percent. Anypost-event bonds would be paid back from assessments that would beplaced on most other property and casualty insurance policies inFlorida, including auto insurance policies.

"Yes, we could get as much as $8 billion, but it would be veryexpensive," Sink said.

She said that only real solution for the Cat Fund's ongoingfinancial woes is to hope that Congress will agree to passlegislation that would allow the federal government to purchase CatFund bonds issued by the state. Florida representatives in Congresscontinue to push the idea.

"Clearly we have said all along we will have to go to Washingtonfor assistance," Sink said. The ongoing problems with the Cat Fundcould have ramifications for some of the smaller companies inFlorida that rely on it for reinsurance. One rating agency hadthreatened to downgrade companies if it concluded that thecompanies do not have sufficient additional backup resourcesoutside of the Cat Fund in order to pay off claims.

Shortfall Downsized

But the potential shortfall for the Cat Fund is smaller than itcould have been if state lawmakers had not acted during theirannual session.

The Florida Legislature passed a bill that would gradually phaseout the TICL layer of the fund by $2 billion a year over a six-yearperiod while also increasing the price of this coverage. Thelegislation also requires insurers to pay a "cash buildup" thatwould start at five percent and eventually reach 25 percent. Forthe coming year, this provision is expected to raise residentialinsurance premiums by 0.5 percent.

Nicholson said that this cash build-up factor would bring in anestimated $50 million this year and would grow to $250 million."That will be very significant in building resources," Nicholsonstated. "It may help us so we have better liquidity and not worryas much about going out and financing in a tight credit market… .We will still consider the financial markets and what our needsare, but when you can build up the cash it is a big plus."

The legislation would also allow insurers that bypass the TICLlayer to pass on to consumers the cost of purchasing privatereinsurance. The cost of this additional reinsurance could notexceed 10 percent. Figures showed that in 2008, 133 insurers spent$217 million to purchase the TICL layer.

Sen. Garrett Richter (R-Naples), and chairman of the SenateBanking and Insurance Committee, called the legislation a way tolet Florida get out of the hole that it has been digging the lastfew years.

Nicholson had a more succinct view: He said the bill moves theCat Fund down a path that will ensure its ability to pay off itsclaims. "What I am really concerned about is paying off ourclaims," said Nicholson. "We need to have an amount of capacitythat is fundable. We are moving closer and closer in thatdirection."