CAT Fund looking for backup but Washington may be only help

TALLAHASSEE – March 11, 2009 – With less than three months before another hurricane season, the state of Florida will try to line up financial backing for the battered Florida Hurricane Catastrophe (Cat) Fund. But Gov. Charlie Crist and other state officials conceded on Tuesday that the only solution for the state-created reinsurance fund may be hope that the federal government can help – although they were quick to say it would not be considered a “bailout.”

“There is no single silver bullet here,” said Chief Financial Officer Alex Sink. “There’s no private market out there that has a lot of cash lying around right now. … The only place that has liquidity, which means cash, is the federal government.”

The State Board of Administration – made up of Sink, Crist and Attorney General Bill McCollum – gave permission for a financial team to spend the next few weeks sifting through various proposals to shore up the $29 billion Cat Fund, which has been hampered by the ongoing credit crunch.

Recent estimates have concluded the Cat Fund could have trouble borrowing the $18 billion it would need if a storm the size of Hurricane Katrina or Hurricane Andrew slammed into the state.

Some of the options to close part of the gap include having the Cat Fund purchase private reinsurance, or having the Fund purchase a “put option” that secures a promise of financing. Last year, the state spent $224 million to purchase a $4 billion promise from Berkshire Hathaway, the conglomerate led by Warren Buffet.

John Forney of Raymond James Associates, the financial advisor to the fund, also said that there may be a chance to have the Cat Fund issue some bonds ahead of the hurricane season that starts on June 1. Any of the funding approaches, however, could cost the Cat Fund more money, which could force the Fund to increase the premiums it charges to insurers.

All three members of the board agreed, however, that the best chance for shoring up the Cat Fund may be with the federal government. Crist and other state officials have begun lobbying federal officials to ask for a line of credit from the U.S. government in the event a huge storm causes catastrophic losses than cannot be covered by the state’s backup account. One potential problem is that the federal government may not be able to extend that credit line without congressional approval.

Crist and Sink think they can sell the federal government on the idea because the money would be paid back with assessments on insurance policies that the Cat Fund can charge to cover its losses.

“I am relatively optimistic that we will able to be successful with what I believe is the most attractive option,” Crist said.

Sink said federal aid would not be a “bailout” because of the assessments.

“It’s ugly and Floridians are not going to like it,” Sink said. “But we do have a mechanism to repay the government. We would not be asking for a handout.”

The state created the Cat Fund after Hurricane Andrew as a way to provide low-cost reinsurance to private companies so they would not pull out of the state. Lawmakers two years ago greatly expanded the size of the Cat Fund as a way to drive down insurance rates that spiked after eight hurricanes hit the state in 2004 and 2005. Insurance companies must buy a certain amount of coverage and have the option of purchasing additional layers beyond that.

Source: News Service of Florida, Gary Fineout

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