Who would have thought, given what many have called a crisis in the Florida property insurance market, that an insurance company would decide it could improve its bottom line by focusing solely on the storm-plagued Sunshine State?
FedNat Insurance, formerly known as Federated National, is planning to do just that, according to a third quarter financial report from the Florida-based carrier’s holding company. The publicly traded firm (Nasdaq: FNHC) said it is pulling out of all other states after being battered by major storm losses in Texas and Louisiana in the last two years.
“I wouldn’t say it’s a smart move; more of a necessary move,” said Paul Newsome, an insurance industry analyst with Piper Sandler investment bank.
FedNat, founded in Florida in 1992, has been ranked as the fourth-largest homeowners’ carrier in the state in recent years. It expanded into other Southern states, including Texas, Louisiana, Mississippi, Alabama and South Carolina, in 2013. The company accelerated that expansion in 2019 – just in time for a devastating winter storm in Texas early this year and Hurricane Ida, which struck Louisiana this year and left as much as $30 billion in industry claims in its wake.
“The impact of these significant catastrophe weather events has put a strain on FedNat’s capital position and further action is now appropriate. We are therefore exiting the non-Florida markets and refocusing on the improving Florida homeowners’ market…” FedNat CEO Michael Braun said in a report to investors, posted Monday.
Despite recent signals from some Florida-based insurers that they are facing continued losses and “a sea of red ink” from storms, roofing claims and litigation, the Florida market may have improved somewhat for FedNat in the last two years. State lawmakers approved measures designed to reduce assignment of benefits agreements and litigation, and regulators have allowed several significant rate increases for struggling carriers. FedNat has been allowed rate increases amounting to 70% over the last four years.
FedNat also has pared back its Florida book of business by a third, from 272,000 policies in force in 2017 to 168,000 at the end of the third quarter this year. But premiums remained stable at $430 million, due to the rate increases, the company explained.
“As a result, we believe now is the right time to focus on writing policies in Florida, where FedNat continues to have significant market share, strong underwriting and claims handling capabilities, and strong agent relationships,” Braun said in the statement.
The move does not necessarily mean Florida’s market is stabilizing or that FedNat is out of the woods.
“It’s definitely been a challenging quarter for FedNat,” Newsome said.
Braun could not be reached for comment Tuesday. But the financial release said FedNat Insurance Co. was propped up with a $20 million infusion capital from its holding company in September. The company also experienced a net loss of almost $25 million for the third quarter, compared to a loss of $21 million in Q3 2020.
Total revenue decreased by 31% in the third quarter this year and the combined ratio stood at 165.4, well above the U.S. property and casualty industry average of 97.5 for 2020, according to Statista research.
Losses and loss adjustment expenses actually decreased by $39 million – almost 40% – for the third quarter of this year, FedNat reported. The quarter included about $20 million in catastrophe losses from Hurricane Ida. But the numbers were an improvement over this time last year, when the carrier saw $38 million in catastrophe losses due to Hurricane Laura, which struck part of Louisiana, and from Hurricane Sally, which hit the Florida Panhandle.
FedNat may have run into other issues with its Louisiana claims. The company was listed as having 157 complaints from homeowner policyholders in early 2021, the second-highest number, behind the much-larger State Farm Insurance, according to the Louisiana Department of Insurance. In Florida, FedNat ranked fifth, with 339 complaints or about half as many complaints as the state-backed Citizens Property Insurance Corp., the Florida Office of Insurance Regulation reported.
One industry source wasn’t convinced that FedNat’s retreat to Florida will help it in the long run, particularly if Florida is hit by more intense hurricanes in coming years, as expected.
“If thinly capitalized (firms) cannot survive in Texas and Louisiana, it’s hard to see how better pricing in Florida would make a business more sustainable if that state also experienced a few more multi-billion industry loss storms,” wrote Artemis, a reinsurance and insurance securities analysis firm.
FedNat may be able to expand its Florida book as Citizens moves to depopulate, Artemis suggested. Citizens is the largest carrier in Florida and is expected to reach more than 1 million policies by the end of next year. The company has taken several steps to move homeowners to other carriers, including the launch of an aggressive property inspection program over the next four years.
A FedNat spokesman said Tuesday that the carrier would only accept Citizens customers who will pay FedNat’s rates and meet its underwriting standards.
Other industry experts said that while the Florida property insurance market may be more troubled than other states’ markets, many coastal areas are producing big losses for insurers. Florida’s insurance regulator, who is appointed, may have allowed the recent rate hikes while elected insurance commissioners in other states have not.
“They’re cutting their losses and refocusing on their core business in Florida,” Michael Carlson, president of the Personal Insurance Federation of Florida, said about FedNat. “But it’s unfortunate to hear of their financial situation. We need a healthy market here. We need a whole mix of companies writing in the state.”
Despite the problems in the Florida market, FedNat appears to be positioned to survive in the state, said Paul Handerhan, president of FAIR, Federal Association for Insurance Reform, which is based in Florida. He noted that FedNat has sufficient surplus and reinsurance needed to achieve a favorable rating from Demotech, the financial rating service, and to withstand at least two significant storm events in the same year.
To unwind its operations in other states, FedNat said it will “commence an orderly runoff” of its subsidiary, Maison Insurance Co., and will soon file a withdrawal plan with state regulators. Nonrenewals of Maison policies will begin in January in Louisiana, in February in Texas, and in June in Florida.
Demotech recently informed FedNat that it has withdrawn its rating for Maison.
FedNat’s non-Florida book of business has been written through SageSure, a managing general underwriter. By next month, SageSure will work with policyholders to move policies to other carriers, FedNat’s report said. The runoff and transfer should take about 18 months.
“We expect the benefits of this transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses,” Braun said.
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