Cat Fund Officials Confident System Can Handle Anything, But Monster Storm

Florida Hurricane Catastrophe Fund officials were cautiously optimistic during the annual Participating Insurers Conference in mid-June they can handle anything but a monster hurricane.  That is good news because it now appears doubtful the Cat Fund will develop an alternative financing system for the TICL layer that is worth the higher than expected costs and would be approved by the State Board of Administration.

A group of reinsurers has been meeting and analyses continue of a Goldman Sachs proposal to “put” $5 billion in bonds with Berkshire Hathaway, but it appears unlikely a proposal will be presented to the SBA, which serves as the board of trustees for the Cat Fund.

An SBA meeting scheduled for June 17 was cancelled because no final agreement was ripe. The Cat Fund, as one official put it, “may drop the whole thing because the pricing is so high.

The Cat Fund appointed a Financial Services Team this spring to consider alternatives to massive public bond issues, which have been the heart of the FHCF financing plan for major hurricane events. The New York financial markets are reeling and there is a lot of uncertainty about the ability of the Cat Fund to finance through bonding its TICL layer, the upper $12 billion of a $28 billion total program.

The latest “put” proposal is a $5 billion “take it or leave it” offer, at a 5.6 percent charge, or $280 million. It would kick in after an industry residential loss of $25 billion, based on Property Claim Services Service estimates. A major reinsurance proposal thrown on the table earlier would have cost the Cat Fund $1 billion for $5 billion in coverage

Jack Nicholson, FHCF senior officer, and John Forney, Raymond James & Associates, financial advisor for the Cat Fund and Citizens Property Insurance Corporation, participated in a panel during the Cat Fund’s annual Participating Insurers Conference in Orlando last week.

Their conclusion was, the news is mixed. From a liquidity standpoint, the Cat Fund is in the best shape in its 15-year history, with $8.1 billion in cash. This consists of $3.6 billion in cash surplus from premiums and $4.5 billion in pre-event bonding already implemented. This would be on top of the $6.878 billion industry retention for the 2008 hurricane season and a 10 percent co-pay once the Cat Fund triggered.

In addition, the Cat Fund’s underwriters are guardedly confident they could issue $10 billion in bonds for anything less than a single monster hurricane because the financing could be spread out for as much as four years. They note that it took 50 weeks for the Cat Fund to pay its first $3 billion in the 2004 hurricane season.

Anything we have faced so far we could handle again with much greater ease,” Nicholson said during the panel.

The bad news is the major difficulty the Cat Fund would have in timely producing the tens of billions of bonds which would be necessary with a 100-year storm event that would require its $28 billion in total capacity. With the economic markets in the state they are in now, that is just not in the cards.

The “97 percent probability” events can be handled, Nicholson and Forney said. The 3 percent probability event” triggers a crisis. That would be a ground up residential loss of $25 billion or more, something the Cat Fund has never faced, and a 100-year event statistically – something not likely this year, but possible.