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

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

"There is still a significant amount of uncertainty that the Cat Fund 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 Fund probably has nearly enough to cover the claims associated with the mandatory layer of coverage that all carriers in Florida must purchase in order to sell homeowners' policies. The $8 billion borrowing estimate is significantly better than the sobering $3 billion estimate from last October, when the nation's credit markets were severely tightened.

But right now the Cat Fund is still projecting that it could not cover any claims associated with the highest layer of exposure known as the Temporary Increase in Coverage Limit (TICL). This optional $12 billion layer was created in 2007 by lawmakers in an effort to bring down insurance rates.

Citizens, the state's largest property insurance carrier with more than 1.03 million policies, has already said it plans to purchase coverage from this layer of reinsurance for the upcoming hurricane season because private reinsurance is too expensive.

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

Forney said he has grown tired of what he calls "Cat Fund bashing" that ignores the fact that the fund's ability to recover money through assessments gives it a good way to eventually pay claims. "It is an unfair extrapolation to say that is an indictment of the entire Cat Fund," said Forney of the shortfall. "The one thing that has not changed with regard to the Cat Fund is the fundamental strength of its credit and its ability to repay bond holders."

Sink Disagrees

But Chief Financial Officer Alex Sink — who has warned repeatedly about the need to scale back the state's risks associated with the Cat Fund — is not as optimistic. She noted that the revised $8 billion bonding estimates only hold up if the state agrees to pay interest rates that could exceed 10 percent. Any post-event bonds would be paid back from assessments that would be placed on most other property and casualty insurance policies in Florida, including auto insurance policies.

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

She said that only real solution for the Cat Fund's ongoing financial woes is to hope that Congress will agree to pass legislation that would allow the federal government to purchase Cat Fund bonds issued by the state. Florida representatives in Congress continue to push the idea.

"Clearly we have said all along we will have to go to Washington for assistance," Sink said. The ongoing problems with the Cat Fund could have ramifications for some of the smaller companies in Florida that rely on it for reinsurance. One rating agency had threatened to downgrade companies if it concluded that the companies do not have sufficient additional backup resources outside of the Cat Fund in order to pay off claims.

Shortfall Downsized

But the potential shortfall for the Cat Fund is smaller than it could have been if state lawmakers had not acted during their annual session.

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

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

The legislation would also allow insurers that bypass the TICL layer to pass on to consumers the cost of purchasing private reinsurance. The cost of this additional reinsurance could not exceed 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 Senate Banking and Insurance Committee, called the legislation a way to let Florida get out of the hole that it has been digging the last few years.

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