Florida Tribune
Gary Fineout
May 16, 2011
Hurt by the ongoing volatility in the municipal bond market, Florida’s main backup fund for insurance could have a much tougher time coming up with money to pay off major losses during the looming hurricane season.
A new round of estimates prepared for the Florida Hurricane Catastrophe Fund conclude that the state-created reinsurer could borrow just enough to cover all of its obligations for 2011 — but the estimates are roughly $4 billion less than ones drawn up by the fund’s financial advisors last October.
“Our cushion has eroded,” noted Cat Fund chief operating officer Jack Nicholson.
An advisory council is expected to sign off on the revised estimates on Tuesday.
The Cat Fund remains an important part of Florida’s overall insurance market since it sells low-cost reinsurance to both Citizens Property Insurance Corp. and to private reinsurers. In 2007, state lawmakers greatly expanded the size of the Cat Fund in the wake of skyrocketing premiums among private insurers.
The size of the fund is being trimmed back down. But part of the overall capacity of the fund depends on the ability to borrow money after a storm, or a series of storms.
Last year financial advisors concluded the fund could borrow up to $16 billion if the state was struck with devastating storms and needed to pay off reinsurance claims.
The new estimates, drawn up by consulting with Wall Street firms, conclude that the fund could now borrow about $12 billion. That’s just slightly higher than the $11.3 billion the fund would need to borrow in order to pay off all of its obligations.
“Given current market conditions, significant uncertainty still exists as of the FHCF’s bonding capacity after an event,” states the overview prepared by John Forney of Raymond James & Associates, the financial advisor for the reinsurance fund.
Forney’s presentation notes that there has been a significant drop in the amount of municipal bonds issued this year. There has been a bit of volatility in municipal bond markets as some investors earlier this year fled the markets amid fears of financial instability. But lately the trends have shown more stability.
Another item that could hurt the resources of the Cat Fund is the fact that it will lose access to $3.5 billion in bond proceeds next year as those bonds mature.
Despite the new estimates, there are two positive trends for the Cat Fund. Insurers continue to pare back the amount of optional reinsurance they are purchasing from the Cat Fund, which lowers its obligations.
Nicholson also noted that the Cat Fund is expected to have more than $7 billion on hand by the end of the 2011 hurricane season.
“The project cash balance of $7.245 billion is a big plus,” Nicholson said, adding that it would “buy us some time” in the event a major storm hit.
Any bonds issued by the fund would have to be paid back by assessments on most insurance bills. Currently insurance customers in Florida already pay an annual assessment for bonds issued to pay off claims from the 2004 and 2005 storms.
http://fltrib.com/states-hurricane-fund-could-have-tougher-time-getting-money-storm-season
