Earthquake prompts downgrade for disaster fund

Photo / Simon Baker

The Local Authority Protection Programme Disaster Fund (LAPP), which was set up by local bodies to replace infrastructure after a natural disaster, has been downgraded following last year's Canterbury earthquake.

The magnitude 7.1 quake, which may cost reinsurers as much as
US$6 billion, used up more than half the LAPP's equity, according to second-tier rating agency A.M. Best Co.

That call prompted the agency to cut the fund's financial strength rating to B++ from A, and its issuer credit rating to bbb from a. The ratings have been put on a negative outlook, from negative implications.

"The ratings reflect LAPP's high net retention of risk, and the resulting weak stressed risk-adjusted capitalisation," A.M. Best said in a statement.

"While there is limited potential growth in its membership base, LAPP also faces competitive pressures if it tries to enact large re-pricing."

The fund was set up in 1993 and was designed to cover local authority owned infrastructure assets. It has 59 members, made up from various local bodies, and has equity of some $40 million, according to its website.

A.M. Best said the earthquake caused its capital adequacy ratio to deteriorate "significantly," though it has the ability to "quickly accumulate its surplus."