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Timing hurts state cash quest
A deal on bonds for the catastrophe fund will have to wait.
By JENNIFER LIBERTO, Times Staff Writer
Published August 25, 2007
TALLAHASSEE - The Florida Cabinet agreed last month that the catastrophe fund needs some backup cash, but members chose a lousy time to go looking for it.
The credit crunch roiling the world's financial markets has stymied efforts by the state's fund managers to find a good rate on a bond deal. The state hopes to raise up to $7-billion for the cash-poor catastrophe fund.
Friday, state Board of Administration fund managers issued a statement that they have decided to delay issuing bonds until the financial markets stabilize.
The bond deal -- which would be the state's largest to date -- was always a backup plan to shore up the fund.
But the announcement of the delay comes at an ominous moment -- just days after Hurricane Dean heralded the beginning of what is typically the most active part of the storm season.
Why the wait?
By waiting, Florida could find a better rate on the bonds later, state fund managers and analysts agree. To average Floridians, the decision means that potential assessments, fees collected by the catastrophe fund that show up on insurance policies, would be pricier if bonds were issued now than if the state were to wait.
"The wise course of action is to allow the financial markets to resolve the interim instability and then continue with our liquidity offering," said Chris Kise, the governor's chief general counsel. "Why do we want to engage in a transaction when the conditions aren't as favorable as we would like?"
No one is quite sure when things are going to calm down, but a spokesman for Goldman, Sachs & Co., one of the underwriters of the deal, suggested the bond markets could be more stable after Labor Day.
However, critics of recent Florida insurance policy wonder why the Florida Cabinet waited more than six months to look to the bond markets to shore up reserves, given that the state decided in January to expand the catastrophe fund and take on more risk.
"Our question is: Why did they wait so long?" said Jessica Hanson, spokeswoman for the Property Casualty Insurers Association of America. "Florida barely missed a monster Category 5 hurricane due to a high pressure system in the gulf and forecasters still predict a busy remainder of the season. ... Private insurers would be put out of business if they operated this way."
The state catastrophe fund has always had the ability to issue bonds and assess policyholders after a major hurricane. But, the Florida Cabinet decided that the catastrophe fund needed more in the bank before a hurricane.
The state catastrophe fund has $3.8-billion cash on hand now and will have $5.2-billion by the end of the year. Yet, the state is liable for up to $28-billion if a series of major hurricanes hits.
In January, legislative leaders and the governor decided that the best way to force insurance rate cuts was for the state to take on more risk. The way it does this is to offer cheap backup coverage to insurers. But it's a gamble, because even with this bond issue, the state's exposure is enormous. Consumers would be required to pay the multibillion dollar shortfall if storms hit.
That decision has come under fire lately, since rates haven't fallen as much as state leaders or policyholders expected. Republicans and Democrats have lately wondered aloud if the risk was worth it.
"What the Legislature gave they can taketh away," Gov. Charlie Crist said the same day the Florida Cabinet approved the bond issuance.
Meanwhile, insurers, citing the catastrophe fund's low cash reserves, are purchasing a special kind of reinsurance that would give them access to quick cash to pay claims if hurricanes strike, in case the catastrophe fund is slow to pay. They're also seeking to charge policyholders for that cost.
State Farm Florida doesn't buy that exact kind of extra reinsurance, but it does account for such "worst case scenarios" in their reinsurance contracts, because rating agencies require them to, said Chris Neal of State Farm Florida, the largest private purchaser of catastrophe fund insurance.
"We're fairly confident in the solvency in the cat fund for any one event. Where it comes into question is multiple large events," Neal said. "There's the concern that they'll run out of capacity before they run out of hurricanes."
Florida's catastrophe fund provides reinsurance for companies that write property and casualty policies in the state. It is liable for $28-billion in losses if a series of hurricanes hits. To raise money, the fund is permitted to assess fees on insurance policies. It can also sell tax-exempt bonds, using those fees as collateral.