Catastrophe fund managers meet with industry, hoping for the best

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With two weeks to go before the hurricane season officially begins, players in the multi-billion dollar property insurance market meet in Orlando Tuesday to prepare for the worst and hope for the best, reports Michael Peltier of the News Service of Florida.

With $17 billion in obligations, the Florida Hurricane Catastrophe Fund could find itself about $1.8 billion short if it has to go to the bond market immediately following a particular devastating storm, according to an analysis prepared an upcoming workshop this week on the catastrophe fund.

But the state remains in strong financial position to weather a particularly bad storm if allowed to pay off claims within a two-year period, a scenario seen as much more likely.

“If the (CAT fund) can realize and use its estimated 12-24 month post-event bonding capacity of an additional $5 billion, it could meet its full initial season obligation and apply additional bonding amounts and fund balance accumulated during that period to subsequent season claims paying capacity,” according to an analysis compiled by Raymond James.

State CAT fund officials are scheduled to meet this week with insurance industry representatives for an overview of the state-backed fund.

In order to meet its mandatory level of just over $17 billion, the CAT fund would have to float about $8.8 billion in bonds. Conservative estimates of the current bond market, however, say the capacity for such bond sales would tap out at $7 billion, leaving the gap.

Jack Nicholson, chief operating officer of the fund, said the $1.8 billion estimate is merely an indicator telling private insurers what their potential re-insurance needs may be. For large companies able to string out their losses over a two year period, the gap in coverage will have little impact.

Smaller companies, however, may consider the figure and determine that they need additional re-insurance from the private market in case a severe storm hits.

“If a company can wait two years to tap into the fund, they are fine. But for some smaller companies, the lag may be a legitimate concern,” Nicholson said

The CAT fund does an analysis of its bonding capacity twice a year – in May and October – the May figure is used primarily as a gauge of the availability of bond investors. During the credit crisis of 2008, the state would have only been able to secure about $3 billion from the bond market, a far cry from the $13.3 billion in potential losses.

If the state can’t meet its obligation through traditional bonding, it can levy assessments on policyholders or can go to the bank lending market to make ends meet.

“However, complete certainty of funding for the FHCF can only be achieved by increasing the pre?event committed cash resources of the fund for example, by doing a pre-event liquidity funding program or by decreasing the potential obligations of the fund – or both,” the analysis concludes.

Peter Schorsch is the President of Extensive Enterprises and is the publisher of some of Florida’s most influential new media websites, including SaintPetersBlog.com, FloridaPolitics.com, ContextFlorida.com, and Sunburn, the morning read of what’s hot in Florida politics. SaintPetersBlog has for three years running been ranked by the Washington Post as the best state-based blog in Florida. In addition to his publishing efforts, Peter is a political consultant to several of the state’s largest governmental affairs and public relations firms. Peter lives in St. Petersburg with his wife, Michelle, and their daughter, Ella.