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The Florida Hurricane Catastrophe Fund, a key reinsurance provider, has a shortfall of $18.5 billion, which could pose problems for some of the state's recent insurance startups, state officials indicated.

Jack Nicholson, chief operating officer for the state fund, said yesterday, prior to a briefing session with the State Senate Ways and Means Committee, that the fund under legislation approved last year is required to provide $29 billion in reinsurance, but may not be able to meet that obligation under today's bond market conditions.

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

To extend ratings for such companies past May 15 will require definitive word of full backing by the fund or documentation of financing from "bridge loans or alternative financing mechanisms that provide liquidity" while the fund is raising capital, said Demotech President Joseph L. Petrelli in a letter he posted on the firm Web site.

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

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

Mr. Petrelli said at this point his firm, which has been in business since 1985, rates about 62 Florida insurers, and since his notice was posted somewhere in the range of 30-to-40 percent of the firms have provided documentation indicating they have adequate financial strength and the rest are in various states of review.

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

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

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

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

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

Demotech's possible action and the catastrophe fund's shortfall are 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 by Demotech created a poignant question, since if the rating firm were to pull the ratings of insurers then their customers would have to make decisions 15 days before the start of the hurricane season.

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

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