The Council, which is required twice a year to calculate bonding estimates for the Cat Fund, approved the estimates after hearing a sobering report prepared for them by a team of financial advisors. The team of advisors concluded that the turmoil in the financial markets have made it virtually impossible to borrow the amount of money that the Cat Fund is currently obligated to cover.

The final estimate shows that the Cat Fund could probably only borrow from $1.5 billion to $3 billion in the next six to 12 months, giving it a total capacity between $11.7 billion and $13.2 billion. But in the event that money were needed sooner, the situation is even bleaker, with one financial advisor publicly stating that the Cat Fund could maybe borrow as little as $250 million if the money were needed in the next three months.

Outgoing State Rep. Don Brown (R-DeFuniak Springs), an insurance agent and one of just two House members to vote against the expansion of the Cat Fund, listened to the presentation and had one word for it: “Scary.”

“What we are basically saying is we can't pay under current conditions,” said Brown, who attended the meeting where the bonding estimates were approved. “That's not good.”

Cat Fund Has Money on Hand

However, Jack Nicholson, chief operating officer of the Cat Fund, continues to emphasize that the Cat Fund is not broke and could in fact probably pay off claims for several months if the unthinkable were to happen. He points out that the fund already has in excess of $10 billion available to pay claims. Nicholson notes that the Cat Fund had nowhere near that amount of money on hand when Florida was hit with eight storms in 2004 and 2005 and the fund had to pay out $9 billion.

Nicholson also said that the fund would probably not need a large infusion of cash right away, because it could take months to file and pay off claims to those private insurers who have purchased reinsurance with the Cat Fund.

“We are in a very strong position,” said Nicholson. “We are in the strongest position we have probably ever been in.”

The reason the Cat Fund borrowing estimates are so important is because it was always envisioned that the fund would have to issue some bonds in order to pay off its debts if Florida were hit with a big storm. The fund then pays the bonds back with premiums from private insurance companies and assessments it can tack on existing lines of insurance issued in the state.

John Forney, the lead financial advisor for the Cat Fund, asserted that the fund model is still a viable one. Forney, who works for Raymond James & Associates, maintains that the bonding shortfall should not be viewed as an “indictment of the system,” but rather as recognition that the financial crisis has wreaked havoc on the credit markets.

Forney also said the ongoing situation showed that it was a wise decision earlier this summer for the state to pay $224 million to Berkshire Hathaway for a “put option,” where the company guaranteed it would purchase $4 billion in bonds in the event losses cross the $16 billion threshold.

Forney said there “is something to be said” for pointing out what he called the “strong attributes” of the fund. He said the fund still maintains an AA bond rating and remains attractive to some investors because of its ability to impose assessments on insurance policies, which he said was “akin to a sales tax.”

Forney also suggested that private insurance carriers should look to building up their own “liquidity” as well so they can pay out some claims before turning to the Cat Fund. And he added that the situation could quickly change in the next few months and credit markets could ease.

“Nobody's crystal ball is clear right now,” said Forney.

Backup for Fund Urged

But while Forney urged people to not focus on the “gloom and doom part of the presentation,” those representing some of Florida's largest private insurers are less upbeat about the situation.

Mark Delegal, an attorney and Tallahassee lobbyist for State Farm Florida, publicly asked that the state purchase additional private reinsurance to cover any potential losses. Delegal noted Hurricane Wilma hit the state in late October 2005 and it was plausible for another late season storm to surface this year. Delegal said he talked to reinsurers who said that there was $10 billion of coverage available.

“We would encourage you to shore up the Cat Fund as much as possible,” said Delegal. “We would like to hope and pray there would not be a hurricane between now and the end of the year, but it could happen.”

But Nicholson countered that such a move may not help. He said it was much better to keep the cash the fund has on hand in case of a storm rather than use some of it to purchase additional reinsurance to cover potential losses.

Another point brought up by some private insurance representatives: How can the state force insurance carriers to “pass on the savings” of the Cat Fund's cheaper reinsurance if it can't provide a guarantee that it has the money to pay off claims?

Nicholson said that's a legal issue left up to the Office of Insurance Regulation and state lawmakers who mandated that private carriers utilize the fund. But there is some fear it could affect rates, especially if there is a push for them to acquire additional reinsurance. A.M. Best issued a statement in mid-October where it said it was “concerned with the contingent capital nature” of the fund.

One member of the advisory council, however, maintained that the federal government would step forward and provide assistance if the state were hit with a storm of such size that it would wipe out the existing Cat Fund assets.

“I don't want to depend on the federal government to be the backstop, but we are na?ve if we walk out of here saying the Cat Fund won't pay its claims,” said John Auer of American Strategic Insurance Company.

Additional Wall Street Fallout

The problems of the financial crisis haven't just hit the Cat Fund's borrowing ability. They have also hit the fund itself. The actual cash balance of the fund has suffered losses due to the unprecedented downturn in the market. An October presentation to the advisory council stated that there had been $216 million in realized investment losses and a $139 million loss in potential losses using mark-to-market investment guidelines.

Right now the current fund balance is $2.31 billion, with an expected ending-year balance of $2.78 billion. Richard Smith, a portfolio manager with the State Board of Administration, said that while overall investments continue to perform well, it was the “worst 11 months” in the history of the fund.