Florida Insurance Commissioner Kevin McCarty tried to lobby members of Congress last week for a federal line of credit to help cover an $18.5 billion shortfall in the state’s Hurricane Catastrophe Fund, a gap that could pose problems for some of the state’s recent insurance startups.

Indeed, “the potential inability” of the Florida Hurricane Catastrophe Fund to honor claims might adversely affect the Financial Stability Rating of carriers dependent on the reinsurance the state fund provides, Demotech Inc. warned last November, giving May 15 as a deadline for reassessing the situation.

To extend ratings for startup property insurers in Florida past May 15 will require definitive word of full backing by the cat fund, or documentation of financing from “bridge loans or alternative financing mechanisms that provide liquidity” while the fund is raising capital, Joseph L. Petrelli, president of the Dublin, Ohio-based Demotech, said in a letter on his Web site.

Unlike most rating services, Demotech evaluates insurers in business less than three years, thus providing ratings for most of the startup firms launched since the state was hit with big storm losses in 2005, explained a representative of the Florida Office of Insurance Regulation, Ed Domansky.

Without Demotech’s Financial Stability Rating indicating they are sound, the newer firms would be unable to operate, he said.

Jack Nicholson, chief operating officer for the cat fund, explained that under legislation approved last year, the fund is required to provide $29 billion in reinsurance—but may not be able to borrow enough to meet that obligation under today’s tight bond market conditions.

As a result, Commissioner McCarty tried to talk last week with U.S. House Reps. Ron Klein and Debbie Wasserman-Schultz—both Florida Democrats—but due to President Barack Obama’s trip to Ft. Myers, neither was able to personally meet with him, according to Mr. Domansky.

The commissioner, he reported, did meet with Rep. Klein's chief of staff and legislative director, as well as with Rep. Wasserman-Schultz's chief of staff, legislative director and deputy legislative director, and with someone from Gov. Charlie Crist's Washington, D.C. office.

The commissioner’s goal was to propose that “Florida be considered for a federal line of credit, for which the state would pay a premium and would recoup any advances through bonding and statutory assessments within Florida,” Mr. Domansky said.

However, the commissioner took heat from a conservative think tank for seeking federal support.

“Reliance on a federal bailout as official state policy is reckless at best,” according to Christian Cámara, Florida office director for the Competitive Enterprise Institute, which describes itself as a nonprofit public policy group dedicated to free enterprise and limited government.

“Instead of lobbying Washington politicians for money, Commissioner McCarty and Gov. Charlie Crist should return to Tallahassee and work together with the legislature to restore a healthy, competitive insurance environment to ensure that Florida is able to weather the aftermath of a storm,” he added.

“Taxpayers should not be forced to bail out either Florida or the politicians that have placed the state one storm away from economic meltdown,” he said.

Mr. Domansky countered that “the commissioner is not proposing a bailout or asking for a blank check, and any suggestion to the contrary is untrue.”

He added in an e-mail that “the line of credit would be triggered only in the extremely unlikely event that a storm exceeding the claims-paying ability of the cat fund were to hit Florida and the credit markets were still in disruption.”

Still, Mr. McCarty’s lobbying effort was characterized as a “really, really bad idea” by CEI Senior Fellow Eli Lehrer, who directs the group’s Washington-based Insurance Project.

“We’ve already done far too many bailouts of private companies. State governments—particularly ones that make bad decisions—don’t need bailouts as well. Congress should say ‘No’ to Kevin McCarty,” according to Mr. Lehrer.

Demotech rates about 62 Florida insurers, according to Mr. Petrelli, who said that since his notice was posted, somewhere in the range of 30-to-40 percent had provided documentation indicating they have adequate financial strength, while the rest are in various states of review.

“Our hope is that things get resolved at the cat-fund level,” said Mr. Petrelli, adding that in the meantime, there are “various opportunities for insurers to address a short-term liquidity issue.”

He said he was surprised at the consternation his November letter caused, and he had various meetings with officials at the Office of Insurance Regulation, the state Attorney General’s Office and other departments to reassure them he was not taking precipitous action.

Mr. Domansky said they understand now that the letter was not a threat, noting that May 15 is the date when the legislature is due to end its session and presumably find a solution to the state’s insurance woes.

Mr. Nicholson said the fund is currently healthy in terms of liquidity. “We’re rated ‘double-A-minus’” [by Standard & Poor’s and Fitch], but would not be if the fund were to sustain $29 billion or $30 billion in losses.”

He said that by year’s end, the fund expects to have $4 billion in premium payments, $3.5 billion in notes, and bond capacity for perhaps $3 billion, which adds up to $10.5 billion—or “$18.5 billion short of our optimum level.”

Demotech’s possible action and the catastrophe fund’s shortfall are a matter of concern to many in the industry, including Henry K. Williams, a Marianna, Fla.-based State Farm agent.

Mr. Williams said via e-mail that the May 15 date posted by Demotech created a poignant question, since if the firm were to pull its ratings of insurers, then their customers would have to make decisions 15 days before the start of the hurricane season about where to get coverage.

He said state officials had made negative comments about State Farm purchasing too much reinsurance, but “it seems to me, in light of the situation with the [cat fund] and the intentions of Demotech, that they may not have been trying to buy enough.”

Copyright © 2009 by National Underwriter Property & Casualty Magazine