A.M. Best Concerned Over Insurers’ Exposure to the Florida Hurricane Fund

Based on the recently revised projected claims-paying capacity of the Florida Hurricane Catastrophe Fund (FHCF), rating agency A.M. Best has updated its treatment of reinsurance provided to rated entities from this structure.

As it previously indicated, A.M. Best said it remains concerned regarding the ability to fund all obligations associated with the FHCF in the case of a severe hurricane. These concerns are largely based on the contingent capital nature of the FHCF and ability to bond what could potentially be one of the largest public debt offerings.

In addition, A.M. Best said it remains concerned about the potential liquidity and cash flow issues that might arise from such an event create an additional level of uncertainty.

However, A.M. Best said it is is cognizant of the FHCF’s current financial position including cash on hand and previously arranged pre-event bonding.

Nevertheless, in the case of a major event, the ability to bond the amount necessary to fund all previous obligations could prove difficult due to current credit market issues, according to the rating analysts. There is also the potential that in such a severe event, the federal government will intervene via the purchase of the bonds directly or some other form of support. However, A.M. Best said it cannot pre-suppose such an action when evaluating an individual carrier’s risk-adjusted capital position.

Based on the revised claims-paying capacity recently released, as well as A.M. Best’s analytical judgment, coverage provided by the FHCF’s mandatory layer will be reduced by 12.5 percent in A.M. Best’s assessment of risk-adjusted capitalization. Based on the October 2008 estimated claims-paying capacity, this reduction was previously 17 percent. The improvement largely reflects the increased cash position of the FHCF. Given the lack of funding regarding the Temporary Increase in Coverage Limits (TICL), no credit (100 percent reduction) will be provided for this layer. A.M. Best believes that reducing the amount of coverage provided via the FHCF and relating it to the projected borrowing capacity represents a more accurate view of overall risk-adjusted capitalization.

In advance of the 2009 hurricane season, those companies with significant potential gaps in reinsurance coverage and correspondingly inadequate risk-adjusted capitalization associated with these adjustments will likely face negative rating pressure.

For more information, visit www.ambest.com.