Hurricane fears dog AM Best

AM Best has expressed concern over the claims-paying capacity of the Florida Hurricane Catastrophe Fund (FHCF) and has updated its treatment of reinsurance provided to rated entities from the FHCF.

It is worried whether the FHCF will be able to bond potentially the largest public debt offering if the hurricane season turns out to be as bad as expected and it needs cash to cover claims.

AM Best said the FHCF`s mandatory layer will be reduced by 5% in AM Best`s assessment of risk-adjusted capitalisation. Based on the May 2009 estimated claims-paying capacity, this reduction was previously 12.5%.

The improvement reflects the increased cash position of the FHCF as well as more favourable credit market conditions.

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.

Wider impact

AM 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. This will have no overall ratings impact.

Given the importance of the FHCF in Florida-based companies` overall reinsurance structures and its contingent capital structure, AM Best views this ongoing evaluation as prudent in the assignment of ratings.