BRADENTON, Fla. - When Florida Sen. Bill Nelson, D-Fla., introduced the Catastrophe Obligation Guarantee Act two weeks ago today, he asked Congress what Florida, Louisiana, Texas, and California have in common.

In addition to being Sunbelt states, Nelson said, they are subject to natural catastrophes ranging from hurricanes to earthquakes and each has had to develop agencies to deal with the challenge of providing homeowners' insurance in markets where the private sector won't.

Nelson explained that the Sunshine State created the Florida Hurricane Catastrophe Fund to provide reinsurance for the private insurance market to induce companies to continue to sell insurance in the state.

But tax-exempt agency officials like those at the Cat Fund have found they face increasingly limited access to the debt markets to raise funds needed to pay potential obligations because of the turmoil and uncertainty in the credit markets, according to Nelson.

"So what this legislation will do will provide a backup for the state catastrophe funds by allowing them to have the assurance that when they go into the private marketplace to float bonds to pay off claims after the disaster has hit [they] will have a United States government guarantee," he said.

The Catastrophe Obligation Guarantee Act in Nelson's bill, SB 886, was referred to the Banking, Housing, and Urban Affairs Committee. Last week, Florida's other senator, Mel Martinez, a Republican, joined on as a co-sponsor.

The bill would authorize the U.S. Treasury to offer federal guarantees to any qualifying state-program debt incurred to pay insured losses from major natural catastrophes - up to $5 billion for earthquakes and up to $20 billion for other perils, including hurricanes.

To be eligible, the programs must be tax-exempt and meet stringent criteria, including having a board composed of or appointed by public officials. The program must have a proven ability to repay its debt, such as through an assessment structure, and it must have actuarially sound rates. States must also meet certain building code requirements.

"The purpose of this bill is to help our individual state programs - to make it possible to sell debt," said Jack Nicholson, chief operating officer of Florida's Cat Fund. "The problem is if we had a big loss it may be impossible to fund our entire limit - tomorrow things may change."

The Cat Fund's potential liability to pay claims has reached as high as $28 billion and most of that would need to raised through the bond market. But last fall, the agency's finance team believed it could raise only $13.2 billion because of market turmoil.

Although the Florida Legislature last week passed a bill that phases down some of the Cat Fund's exposure over the next six years, access to the bond market became a concern long before the height of the subprime meltdown restricted bonding capacity even more last year.

When the Cat Fund sold $3.5 billion of floating-rate notes for liquidity in September 2007, Nicholson said the cost for that debt was "four times the cost we originally anticipated."

When access to the bond market worsened for nearly all issuers last year, Nicholson said he discovered that California Earthquake Authority chief executive officer Glenn Pomeroy had already been thinking that federal legislation such as a backstop might be needed.

That led to several meetings that also included representatives from Louisiana Citizens Property Insurance Corp., the Texas Windstorm Insurance Association, and Florida's Citizens Property Insurance Corp. And the idea to seek a federal guarantee or some kind of a backstop was born.

Citizens Property Insurance Corp. currently has 1.04 million policies with a potential exposure of $404 billion. It cannot qualify for the federal guarantee as its rates are not considered actuarially sound because they have been frozen by law for three years, said agency spokesman John Kuczwanski.

The guarantee program would aid the Florida insurer indirectly since it obtains reinsurance from the Cat Fund, he said.

The proposal for a federal guarantee is not a bailout, such as the one extended to banks and financial institutions, stressed John Wortman, who is chief executive officer at Louisiana's Citizens Property Insurance Corp., or CPIC.

"It would be something we could use if all else fails," Wortman said, noting that obtaining the federal guarantee would be more expensive than a typical financing. Those who seek federal guarantees must pay administrative costs, according to Nelson's bill.

"It would allow us, if we had actuarially sound rates and other structures in place, to issue ... bonds with the consent of the secretary of the Treasury," Wortman said.

Wortman said Louisiana's exposure is far less than states such as Florida and Texas. Louisiana's CPIC has 135,000 policies in effect, he said, with a total exposure of approximately $27 billion.

"I would tell these people in our meetings that I felt like a wart on an elephant compared to their situation," recalled Wortman.

CPIC provides coverage to properties in Louisiana coastal parishes that insures residential and commercial properties in non-coastal areas. It is the third-largest property insurer in the state.

Although the 2008 hurricanes proved to be slightly more costly than originally expected, Wortman said claims did not exceed the agency's financial abilities.

CPIC originally estimated that when hurricanes Gustav and Ike hit Louisiana it would cost a combined $180 million to $200 million, but so far it has paid $220 million in claims with more than 1,000 remaining open. It received 50,000 claims from Hurricane Gustav and 3,500 from Ike.

The agency issued $978.2 million of tax-exempt special assessment bonds in 2006 to eliminate the deficit caused by claims resulting from hurricanes Katrina and Rita in 2005. It sold $300 million of bonds in March to convert the auction-rate bonds to fixed-rate debt.

The federal guarantee, should it be approved by Congress, would help entities like the Texas Windstorm Insurance Association, where reserves were depleted by claims arising from Hurricane Ike last year. The TWIA has $68 billion in coverage written along the entire Texas coast.

TWIA manager Jim Oliver said the association can issue bonds, but it currently has no mechanism to pay back the debt.

The Texas Legislature is currently considering SB 14, sponsored Sen. Troy Fraser, R-Horseshoe Bay, which would allow the windstorm association to increase rates or add assessments on to policies to issue up to $600 million of bonds.

Working with Florida, California, and Louisiana was an opportunity to work toward getting a federal guarantee that eventually will help the TWIA, Oliver said.

"Obviously, for us, once legislators decide who can pay these bonds back and at what quantities, then federal backing would allow us to sell more bonds at lower rates," he said. "So federal backing would be a benefit to us. And I'm sure other states might be interested."

"The bond market certainly isn't what it was a year ago," he added.

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