After reviewing the year-end financial statements of the Florida-based carriers it rates, Ohio-based ratings agency Demotech is warning that many insurers could see underwriting and operating losses in their year-end financial statements and that those insurers should be prepared to shore up and strengthen their reserves going forward.
“Florida has experienced three straight years of storms, as well as an [AOB] issue and other court issues – it’s a complex environment,” said Demotech President Joe Petrelli.
On Feb. 18, Demotech announced it had affirmed the Financial Stability Ratings (FSRs) of 51 of the 52 Florida-focused carriers it rates prior to the public release of their year-end financial statements, saying the companies had demonstrated to Demotech realistic estimates of gross and net loss and loss adjustment expense reserves related to claims arising from 2017’s Hurricane Irma and 2018’s Hurricane Michael and that their reinsurance was of “sufficient quality and quantity to expect reimbursement for outstanding losses and loss adjustment expenses…”
Demotech said the Florida companies had met its requirements for affirmation through enterprise risk management protocols, consolidation, or the infusion of enough capital to permit management to continue to implement its business model.
“These affirmations reflect the ongoing dialogue, communication, and analysis that we have had with [the insurers’] management,” said Petrelli.
He also noted in the ratings affirmation announcement that the company has an ongoing review process beyond quarterly statements.
Despite these Florida-focused insurers having their ratings affirmed, on Feb. 28 Demotech said underwriting and operating losses should be anticipated from the year-end financial statements of many Florida carriers.
“Matthew, Irma and Michael represented a named event for each of the past three years,” the statement from Demotech said. “Operating profits proved to be elusive for many.”
Demotech further stated that going forward insurers will need to strengthen their loss and loss adjustment expense reserves to deal with the “difficult operational environment associated with assignment of benefits [AOB] and other judicial precedents that expanded insurer liability…”
“In mid-year 2018, Demotech advised many carriers to get the adverse reserve development behind them. To do so requires that the year-end 2018 statement present significant reserve development in the pursuit of reserve adequacy and future neutral or favorable reserve development,” Demotech stated.
Demotech said insurers will likely make capital contributions to offset reserve strengthening, and that carriers that increased their loss and loss adjustment expense reserves were required to infuse capital to maintain a policyholder’s surplus at a level that sustains their assigned FSR.
Demotech emphasized the importance of the amount of reinsurance Florida carriers must purchase to maintain their rating and “secure meaningful levels of catastrophe reinsurance protection,” with carriers currently ceding 40 to 60 percent of their gross written premium to reinsurance.
The current soft market for reinsurance has been favorable to carriers, Demotech noted, but it warned that its reinsurance requirements will not change should that market harden.
“Know that Demotech will not relax our reinsurance requirements should the cost of catastrophe reinsurance protection change… Should the cost of catastrophe reinsurance increase suddenly or markedly, the business models of several insurers will collide with a financial reality that impinges on their ability to sustain the Financial Stability Rating currently assigned,” Demotech said.
The top three Florida insurers by premium, according to third quarter 2018 data from the Florida Office of Insurance Regulation, released their year-end data since the Demotech announcement:
- Universal Property & Casualty Insurance Co., the number one property/casualty insurer in the state by policy count (636,517) and premium written ($1 billion), according to the Office of Insurance Regulation, writes about 85 percent of its business in Florida and the rest in several other states.
The company said in its Q4 earnings report that its revenue grew 9.6 percent in 2018, driven primarily by higher organic premium volume and rate increases, partially offset by unrealized losses. Its in-force premium grew to about $1.2 billion – up by 12. 8 percent from 2017. Its direct premiums were up by 9.7 percent in Florida. The company said in its earnings call that its underlying growth in Florida was strengthened by the statewide average rate increase of 3.4 percent approved in late 2017 and a policy mix.
Its combined ratio increased by 2.9 points for the year to 87.3 percent, driven by an increase in priory year development and relatively flat expense ratio. Its net losses and loss adjustment expense ratio increased three points for 2018 to 53.9 percent.
The company also made a $97.3 million net allocation strengthen prior accident years’ loss reserves due to an increase in the frequency and severity of non-catastrophe claims spanning several prior accident years, including reopened claims, newly reported clams, increased litigation and increased loss settlements of claims above carried values.
“This reflects the trends and dynamics in the Florida marketplace attributable to assignment of benefits (AOB) and the increased solicitation of prior years’ claims in the post Hurricane Irma environment,” the company said.
- Heritage Insurance, the number three P&C writer in the state (after Citizens Property Insurance Corp.) rated by Demotech, saw a net income of $27.2 million, compared to a loss of $1.1 million in 2017. Gross premiums earned were $926.3 million in 2018 compared to $643.3 million in 2017. Its combined ratio for the year was 90.4 percent compared to 94.1 percent in 2017.
CEO Bruce Lucas said on the company’s Fourth Quarter 2018 earnings call it announced an underwriting moratorium in 2016 in the Florida Tri-County area, which was seeing the most AOB-related claims and litigation related to water losses. He said Heritage saw favorable reserve development in both Q2 and Q3 of 2018 in part because of that decision and a thorough review of litigated claims on its reserves in Q2 of 2018. Lucas said the company is on “very strong footing” with its loss reserves. The company plans to continue diversifying and writing in additional states after expanding into two new states in 2018.
- FedNat, the number four writer in Florida by premiums written, finished 2018 with $14.9 million in net income compared to $8 million for 2017. The company said its improved performance for the year was the result of lower reinsurance spend in homeowners and improved attritional loss experience, offset by investment losses in 2018. Its full year earnings for its homeowners business were $22.2 million in 2018 compared with $3.2 million in 2017.
It received state approval of a statewide rate increase of 4.6 percent for Florida homeowners multi-peril insurance policies, which should become effective for new and renewal policies on April 20, 2019. FedNat also announced in February that it would acquire Maison Insurance Co. from 1347 Property Insurance Holdings.
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