State officials overseeing the Florida Hurricane Catastrophe Fund decided Tuesday that for the time being they will not pursue selling debt or purchasing other financial products to bolster the Cat Fund’s claims-paying ability.
That’s largely because those products are too expensive and bond-issuing capacity has increased somewhat, Ash Williams, executive director of the State Board of Administration, told Gov. Charlie Crist and members of the state Cabinet that oversee the SBA and the Cat Fund. He also said the fund’s financial position had improved because some debt had been paid off.
Last month, the nonprofit, state-run insurer’s potential obligation to pay claims was estimated at up to $29 billion if a catastrophic hurricane or series of hurricanes slammed the state — far exceeding its resources by at least $21 billion. The fund provides low-cost reinsurance to property insurance companies in Florida, as a mechanism to help stabilize the insurance industry.
But the industry must absorb as much as $24 billion in losses before tapping the Cat Fund, Ash said Tuesday. He added that with easing of the credit markets, financial advisers now believe that the fund could raise up to $8 billion of debt to pay claims as opposed to just $3 billion a month ago.
The fund currently has about $4 billion of available cash plus the proceeds of $3.5 million of taxable debt to pay claims. But even issuing new taxable debt to provide liquidity is out of the picture now, Ash said.
The Cat Fund in the past has issued taxable debt then invested the proceeds to pay interest costs until proceeds were needed to pay claims, a so-called pre-event financing. So far this fiscal year, the fund has earned 0.27% on its invested funds. In the same period in fiscal 2008, it earned 4.17%.
“You can see the impact of falling interest rates on the ability to earn a return,” Ash said. “In the current environment, pre-event issuance is undesirable.”
When the market was more stable, the Cat Fund issued tax-exempt debt only after a hurricane to pay claims based on a private-letter ruling from the Internal Revenue Service. Because of dramatic changes in the credit markets, fund officials now plan to ask the IRS for a ruling on whether they can issue tax-exempt debt before a hurricane.
Ash said other ways to fund some of the obligations, such as risk-sharing products or put options, would cost $270 million or more to transfer $1 billion of risk.
Last year, the Cat Fund spent $224 million for a put option from Warren Buffett’s Berkshire Hathaway Inc. that would have required Buffett to buy $4 billion of the fund’s bonds. The debt was never needed.
However, Ash did say other proactive measures are being taken to improve the insurer’s position, including preparing a road show to market the fund to institutional investors now instead of doing it in the days before actually selling debt.
Fund officials are also joining with several other states to ask Washington to consider providing some kind of backstop or guarantee if debt needs to be sold.
Ash said several bills are under consideration by the Legislature that would reduce the Cat Fund’s exposure and build capital faster.
