BRADENTON, Fla. - The ongoing credit crisis may prevent the high-profile Florida Hurricane Catastrophe Fund from selling enough tax-exempt bonds to pay all the claims it has promised in the form of reinsurance to the state's private property and casualty insurers.

The so-called Cat Fund's estimated reinsurance capacity is $13.28 billion in the next 12 months - approximately $13 billion less than what the typical capacity might be - because of current unfavorable bond market conditions and increased interest rates, the fund's advisory board learned Tuesday.

While the Cat Fund has significant liquid resources available, estimated at $10.28 billion, its maximum potential bonding needs are almost $18 billion, according to a report by Raymond James & Associates Inc., the Cat Fund's financial adviser.

"Based on estimates from its three senior managing underwriters, the [Cat Fund] could have a potential bonding shortfall of between $10 billion and $15 billion over a 12-month period given current market conditions," the report said.

In addition to the reduced bond capacity, the fund could face another $125 million in additional expenses from new and reopened claims from the four hurricanes that hit Florida in 2005.

The extra expense would be in addition to the $1.35 billion of tax-exempt bonds sold in July 2006 to pay claims from 2005, and the $625 million of debt sold this July to pay new and reopened claims from the 2005 hurricanes. A task force is studying why there have been so many new and reopened claims from storms that occurred nearly three years ago.

As of June of this year, the Cat Fund's losses from the four hurricanes that hit Florida in 2005 were approximately $5.2 billion.

Despite potential financing difficulties, the Cat Fund has a strong liquidity position with $2.8 billion in year-end cash for the payment of claims, as well as $3.5 billion in floating-rate notes, and a $4 billion put option agreement with Berkshire Hathaway Inc., according to the fund's chief operating officer, Jack Nicholson.

The Cat Fund paid $224 million for the put option, which guarantees that Berkshire will purchase up to $4 billion of tax-exempt bonds issued by the Florida Hurricane Catastrophe Fund Finance Corp. if it needs to issue bonds to pay claims. The put option expires May 15, 2009.

Market difficulties have not yet impacted the Cat Fund's credit ratings. Its bonds are rated AA-minus by Fitch Ratings and Standard & Poor's, and Aa3 by Moody's Investors Service.

However, A.M. Best Co. Wednesday said it is concerned with the contingent capital nature of the Cat Fund given credit market contraction, the fund's reduced claims-paying capacity, and its ability to fund all obligations associated with a severe hurricane.

"A.M. Best continues to view catastrophe risk as a primary threat to solvency due to the rapid and unexpected deterioration that can occur," the company said. It has begun to assess the impact on its rated entities' risk-adjusted capitalization based on the reduction in the potential coverage available from the Cat Fund, said the company.

The state-run, tax-exempt Cat Fund is a low-cost reinsurer designed to promote underwriting capacity by property insurance companies in hurricane-prone Florida.

The 2008 hurricane season technically ends Nov. 30. However, rare, catastrophic late-season hurricanes have occurred.

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