OLDWICK, N.J.--(BUSINESS WIRE)--Based on the recently revised projected claims-paying capacity of the Florida Hurricane Catastrophe Fund (FHCF), A.M. Best Co. has reviewed its treatment of reinsurance provided to rated entities from this structure.
As previously indicated, A.M. Best remains concerned regarding the ability of the FHCF to fund all obligations in the event of a severe hurricane. These concerns are largely based on the contingent capital nature of the FHCF and its ability to bond what potentially could 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 the FHCF’s current cash position, recently released average post-event bonding capacity estimates and A.M. Best’s analytical judgment, coverage provided by the FHCF’s mandatory layer will continue to be reduced by 5% in A.M. Best’s assessment of rated companies’ risk-adjusted capitalization. Given the lack of funding regarding the Temporary Increase in Coverage Limits, no credit (100% reduction) will be provided for this layer, as was the case previously. A.M. Best believes that reducing the amount of coverage provided by the FHCF and relating it to the projected borrowing capacity represents a more accurate view of overall risk-adjusted capitalization.
A.M. Best will continue to assess the amount of credit afforded to reinsurance provided via the FHCF in the context of risk-adjusted capitalization through its proprietary capital model—Best’s Capital Adequacy Ratio (BCAR)—as part of its ongoing rating reviews. As in years past, this assessment will continue to evolve based on events that may occur during the 2012 hurricane season as well as credit market conditions and is subject to change. A.M. Best views this ongoing evaluation as prudent in the assignment of ratings, given the overall importance of the FHCF in Florida-exposed companies’ overall reinsurance structures and its contingent capital structure.
Best’s Credit Rating Methodology provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process and can be found at www.ambest.com/ratings/methodology.
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