After a tumultuous year that included double-digit rate increases, an intervention by the state regulator and a merger, Florida-based insurer Southern Fidelity Insurance Co. (SFIC) and its affiliated entities have ceded a majority stake in ownership to Hudson Structure Capital Management, which does its re/insurance business as HSCM Bermuda.
The transaction became effective on or about Nov. 12, 2020.
According to a statement from the two companies, HSCM Bermuda will provide a capital injection into SFIC in exchange for its majority ownership stake and will take an active role in maintaining and expanding SFIC’s footprint in the Florida, Louisiana, Mississippi and South Carolina homeowners’ insurance markets.
“2020 has been a challenging year for the Southeast homeowners’ insurers,” said Edouard von Herberstein, partner and chief underwriting Officer – HSCM Bermuda. “As rates and the underwriting environment begin to improve, we are excited to support Southern Fidelity as they rebuild.”
James Graganella, CEO of SFIC, said the alliance will strengthen Southern Fidelity’s position in the marketplace.
The move by HSCM Bermuda comes shortly after Southern Fidelity and its parent company Capitol Preferred Insurance Co. (CPIC), two top Florida homeowners insurance writers, merged their business operations. SFIC notified agents on Nov. 6 that CPIC no longer existed as a legal entity.
SFIC, formed in 2005, offers personal lines coverage in Florida, South Carolina Louisiana and Mississippi through independent agents. With the acquisition of CPIC, it now has more than 150,000 policies in Florida and over $230 million total premium, according to June 30 data from the Florida Office of Insurance Regulation. OIR said there is no impact to consumers’ coverage as a result of the CPIC and SFIC merger and acquisition. CPIC consumers will receive an endorsement on their policy, changing the name of the company issuing the coverage to Southern Fidelity. There is no action needed by the consumer to maintain coverage.
“The CPIC book of business now exists as a program of SFIC,” the notice to agents said.
SFIC said in its agent communication the processing of renewals of existing policies would resume Nov. 6, 2020 and the company intends to resume writing new business immediately following the closing of the transaction with HSCM Bermuda. There will be no lapse in coverage for current policyholders.
HSCM Bermuda launched in 2016 and operates as an asset manager focused on investments in the re/insurance and transportation sectors. As of Nov. 1, 2020, it had more than $2.75 billion in capital commitments and assets under management.
Its capital infusion to SFIC prompted the financial services analysis firm Demotech to affirm SFIC’s ‘A’ rating.
“Having reviewed and accepted Southern Fidelity’s vertical and horizontal catastrophe reinsurance program prior to the 2020 – 2021 storm season, Demotech knew that the company could survive even the unprecedented number of storms that struck its Louisiana portfolio in 2020. However, as the dollar amount of capital necessary to replenish surplus increased, we knew management would turn to knowledgeable professionals for funding,” said Joseph Petrelli, president, Demotech.
Southern Fidelity and Capitol Preferred’s financial issues first came to light late last year when Capitol Preferred sought a 47% rate increase from regulators on one of its 14 books of business. It later amended the requested increase to 36.5%. The filing was subject to a public rate hearing in February of this year where CEO Jimmy Graganella told regulators that three factors contributed to the need for the substantial rate increase – reinsurance costs, AOB abuse and first party lawsuits.
According to Graganella, 36% of the company’s claims at that time were called in represented by an attorney, up from 4%. “That’s a massive number,” he said at the hearing.
Graganella provided a detailed account of litigation trends at the February rate hearing, saying water damage claims were the primary driver. He said then the average cost of represented claims is twice the cost of non-represented claims at $24,000. CPIC was paying out $1.77 on water losses for every dollar it took in, he reported, and experienced a 727% increase in lawsuits since 2016.
“That’s substantial. That’s lawsuits, that’s not cases that are represented files that we are able to negotiate prior to the lawsuit – that’s actually lawsuits,” he said.
But raising rates didn’t fix CPIC’s problems. In May, OIR approved CPIC’s shedding of nearly 24,000 policies, saying it was necessary because of the company’s magnitude of losses in 2017, 2018 and 2018, the increased cost of reinsurance and “to protect the best interests of the public and policyholders,” OIR said at the time.
The regulator called the move “an extraordinary statutory remedy reserved to address insurers which are or may be in hazardous financial condition without the cancellation of policies.”
OIR also ordered corrective measures for CPIC and said it would closely monitor the financial condition of the company until further notice.
And just in August, CPIC and SFIC sought additional rate increases – 26.2% for CPIC on 30,000 policies and 31.1% on more than 46,000 SFIC policies – from the state regulator, which was approved as filed and took effect Aug. 1, 2020. In a public rate hearing for the rate requests in September, representatives said first-party litigation on non-catastrophe water loss claims continues to rise, an issue echoed by other Florida insurers in the state.
Overall, lawsuits against Florida property insurers are still going up across the state, October data from Florida-based litigation management and analytics software company CaseGlide shows. There was a 9% increase in litigated claims in October 2020 compared with September, representing a year-over-year increase of 33% from October 2019. Last month also saw the second-largest monthly figure over the past three years, narrowly trailing May 2019’s 5,474 new litigated claims, CaseGlide found.
The insurance industry and some lawmakers say the Florida insurance market is headed towards an availability crisis and are hoping for a legislative fix in the 2021 session.
Update: This story has been updated with information from the Florida Office of Insurance Regulation
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