A.M. Best Comments on Insurers’ Potential Exposure to the Florida Hurricane Catastrophe Fund

OLDWICK, N.J.--(BUSINESS WIRE)--Based on the considerable credit market contraction and recently announced revision in the Florida Hurricane Catastrophe Fund’s (FHCF) claims-paying capacity, A.M. Best Co. is concerned with the contingent capital nature of the FHCF.

A.M. Best previously had indicated its concerns regarding the FHCF’s ability to fund all obligations associated with a severe hurricane. These concerns were largely based on the contingent capital nature of the FHCF and capital market acceptance of what would likely be one of the largest public debt offerings. In addition, the potential liquidity and cash flow issues that might arise from such an event create an additional level of uncertainty. Based on current market conditions, it is only prudent to re-evaluate these expectations in the assignment of ratings, despite the near completion of the 2008 hurricane season. With the 2007 implementation of the Temporary Increase in Coverage Limits (TICL), the FHCF increased its overall exposure considerably. As a result, in February 2007, A.M. Best increased the credit risk factor associated with the FHCF. With recent events in the credit markets, these concerns have been increased considerably.

A.M. Best continues to view catastrophe risk as a primary threat to solvency due to the rapid and unexpected deterioration that can occur. Accordingly, A.M. Best has begun to assess the impact on rated entities’ risk-adjusted capitalization based on the reduction in the potential coverage available from the FHCF. This assessment is based on both the revised claims paying capacity recently released as well as A.M. Best’s analytical judgment regarding the amount of capital that could realistically be raised in today’s volatile capital markets. Those companies with significant potential gaps in reinsurance coverage and correspondingly inadequate risk-adjusted capitalization will be placed under review with negative implications pending additional discussions with company management regarding improving this key metric.

While the majority of the hurricane season is complete, major events can and do happen during this timeframe as was evident in 2005 with Hurricane Wilma. A.M. Best also is cognizant of the FHCF’s current financial position including cash on hand and previously arranged pre-event bonding. In addition, A.M. Best also recognizes that not all funding will be required immediately and could conceivably be spread over time. However, in the case of a major event, the ability to bond the amount necessary to fund all previous obligations in a timely fashion could be difficult given these challenging economic conditions. There also is 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 cannot pre-suppose such an action when evaluating individual carriers’ risk-adjusted capital position.

Beyond the immediate term, A.M. Best will continue to evaluate the amount of credit given to the FHCF in the context of both standard and stress-tested risk-adjusted capitalization through its proprietary capital model—Best’s Capital Adequacy Ratio (BCAR). This assessment will be based on both the stated claims paying ability of the FHCF as well as A.M. Best’s analytical judgment in terms of capital raising capability. Given the overall importance of the FHCF in Florida-property writers’ overall reinsurance structures and its contingent capital structure, A.M. Best believes this is the most prudent approach in the assignment of its ratings given these historic market dynamics.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.