Catastrophe Fund manager sees financing ‘tool’ as potential headache

Mar 19, 2012

The following article was published in The Florida Current on March 19, 2012:

Cat Fund Manager Sees Financing ‘Tool’ as Potential Headache

By Gray Rohrer

A tax credit program for property insurers that’s designed to provide more liquidity and financing for the Florida Hurricane Catastrophe Fund could be more trouble than it’s worth, the fund’s manager says.

Under the Florida Insurance Tax Pre-Payment Program, insurance companies would receive up to $1.5 billion in tax credits over 10 years if they pay their premium taxes early, allowing the FHFC, or Cat Fund, to use the money to pad its liquidity.

Jack Nicholson, chief operating officer of the Cat Fund, told The Florida Current on Monday that the time, effort and cost of implementing the program might not outweigh the benefit of the liquidity it provides.

“Right now I don’t see it as a benefit at all,” Nicholson said.

Senate Budget Committee Chairman JD Alexander inserted the tax break into a budget conforming bill (HB 5505) as last-minute budget negotiations with the House were taking place. The Lake Wales Republican, who had been trying in vain to get the House to take up separate legislation (written in part by Nicholson) to reduce the Cat Fund’s coverage, said the new tax credit program was “another tool” to help finance the fund. Both Nicholson and Alexander have warned that the Cat Fund faces a $3 billion shortfall if a one-in-100-year storm hits the state.

But after the program, which is optional for insurance companies, was tacked onto the budget during the final week of the legislative session that ended March 9, Alexander told reporters that it was “one of the big banks” that pushed for the provision rather than insurance companies.

Nicholson said that given the optional nature of the program and the unknown cost to set up and administer it, the liquidity gained by the Cat Fund can only be guessed at without a formal study. What is certain, he said, is that the bank handling the program could make about $20 million in the process, and that setting up and overseeing the program would distract from the day-to-day administration of the Cat Fund. Borrowing money from the private bond market – the typical financing tool for the fund – might be a better option than installing the new tax credit program, Nicholson said.

“I’ve got a Cat Fund to run and other things to do. That doesn’t seem too efficient to me, instead of going out and selling pre-event notes,” Nicholson said.

Alexander, however, prefers to have other financing options.

“Right now we’re short $3 billion from being able to meet the statutory commitments in the Cat Fund. So this is another way to try to piece together enough cash to make it through the coming hurricane season,” he told reporters when the tax credit provision was added to the budget this month.

Once signed into law, Gov. Rick Scott would have the option of directing Nicholson to set up the program. Nicholson said he would “figure it out” if he receives the order from Scott.

“It’s not optional for us,” he said.

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