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Hurricane season is coming-can Florida survive?

Byline: news@cpifinancial.net (Staff Writer)

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

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, 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 cognisant 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. 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 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 per cent in A.M. Best's assessment of risk-adjusted capitalisation. Based on the October 2008 estimated claims-paying capacity, this reduction was previously 17 per cent.

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 per cent 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 capitalisation.

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

A.M. Best will continue to assess the amount of credit afforded to reinsurance provided via the FHCF in the context of risk-adjusted capitalisation through its proprietary capital model-Best's Capital Adequacy Ratio (BCAR). This assessment will continue to evolve based on events of the 2009 hurricane season as well as credit market conditions and is subject to change. Given the overall importance of the FHCF to Florida-based companies' overall reinsurance structures and its contingent capital structure, A.M. Best believes this ongoing evaluation is critical in the assignment of ratings.

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Publication:CPI Financial
Date:Jun 2, 2009
Words:468
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