The Florida Hurricane Catastrophe Fund (Cat Fund) is likely toincrease its assessments early next year because it is still payingoff claims associated with the eight hurricanes that struck Floridaback in 2004 and 2005.

A number of insurers that purchased 90 percent coverage from theCat Fund have already reached their deductible level for those twostorm seasons, so they are passing on the cost of these new claimsto the Cat Fund.

Many of these requests stem from claims that insurers are payingoff for dam-
ages from Wilma, the slow-moving storm that hit South Florida inOctober 2005.

In a trend that has alarmed Cat Fund executives, the number ofclaims associated with past storms has been increasing, notdecreasing. Recent data shows that the state-created reinsurancefund has sustained $3.95 billion worth of losses from 2004 and$5.45 billion from 2005. That total has been growing asreimbursement requests from insurers have continued to mount. TheCat Fund's reported losses from the two storm seasons increased by$1.4 billion between April 2006 and July 2008. This forced the CatFund to issue bonds in the summer of 2008 to help pay off theseadditional losses.

A breakdown of claims submitted to the fund from Aug. 1, 2008,to Aug. 1, 2009, shows that insurers turned in an additional 382claims tied to the two storm seasons. The fund received 75 claimsjust this past summer alone that stemmed from 2005 losses.

Cat Fund officials now say that they may need anywhere from $300million to $600 million in additional financing to cover thecontinued losses. The current shortfall is $292 million, and it isexpected to continue to grow between now and the end of theyear.

"We are looking to four to eight months before we have a veryserious problem of running out of funds," said Cat Fund COO JackNicholson.

Insurance Commissioner Kevin McCarty — noting the continuingnumber of claims associated with Wilma — said that he isconsidering whether to ask lawmakers this session to impose timelimits on how long claims can continue to be filed to insurers.

While there is much debate about the root cause of the increasedclaims, Cat Fund officials say their only recourse is to increasethe amount of the existing emergency assessments already imposed onmost property and auto insurance lines in the state.

The way the fund is constructed, it cannot use any of the moneyit is taking in now from insurers to pay off claims related to oldstorms. The fund is already imposing a one-percent emergencyassessment on premiums to pay off past storm losses.

Nicholson said he will likely ask the trustees who oversee thefund (Gov. Charlie Crist, Attorney General Bill McCollum, and ChiefFinancial Officer Alex Sink) to approve additional assessmentcharges in early 2010 in order to avoid running out of money to payinsurers.

The shortfall is still relatively small compared to the entire$34.9 billion assessment base utilized by the Cat Fund; mostinsurance customers probably will not see a large spike in theirbills. Nicholson said that it appears at this time that the CatFund will likely approve charges that would add anywhere from $6 to$7.50 a year in premiums to most Floridians.

Overall Outlook Improves

Although the Cat Fund is struggling to pay off past claims, itsoverall financial health continues to improve.

A state-appointed advisory council in October approved newestimates that show the Cat Fund could likely come up with $19billion to pay off claims stemming from a major hurricane. Thatscenario leaves the fund with an estimated shortfall of $4.1billion.

This is a dramatic improvement from last year, when theshortfall was estimated to be as large as $15 billion. Thisturnaround is based on several factors, including the improvingglobal credit markets and a decision this past spring by statelawmakers to scale back the size of the Cat Fund's exposure. Statelegislators also increased the cost of coverage and authorized thefund to impose a rapid cash build-up charge.

"It all adds up to a very good trend," said John Forney ofRaymond James & Associates, the lead financial advisor for thefund. "It adds to a much more robust financial performance for theCat Fund."

Currently, the Cat Fund has liquid resources of approximately $8billion before it would need to go into the bond market foradditional funding. Forney estimates that there is a 5.3 percentchance that the fund would need more than that $8 billion in onestorm season. "The Cat Fund has enough money; the Cat Fund is in arelatively good position," said Forney.

The improving financial outlook means that the Cat Fund isfinally in a position to handle all of its coverage obligationsunder the so-called mandatory layer. This is the reinsurance thatall carriers in Florida are required to purchase.

The $4.1 billion shortfall now only applies to the highest layerof coverage known as the Temporary Increase in Coverage Limit. Thisis an optional coverage for insurers that many private carrierschose not to purchase this year. Currently, the largest customer ofthis highest layer is the state-created Citizens Property InsuranceCorp.

Nicholson noted that between its cash and $11 billion bondingcapacity, the Cat Fund could probably handle a storm along the sizeof Hurricane Andrew. He also pointed out that the Cat Fund wouldalways seek to borrow the full amount of money needed to reimburseinsurers.

But he said the real danger from the shortfall is that it couldprevent the Cat Fund from being able to fully reimburse insurers ina timely fashion, putting them in possible danger ofinsolvency.

Nicholson also warned that while the fund could likely withstanda major hurricane or an active storm season, it could not handleback-to-back storm years like 2004 and 2005.

"We are basically right now a one-storm wonder," saidNicholson.