Florida-based FedNat Insurance Co., six months after it pulled out of other states to concentrate on Florida, woke up to some potentially bad news on Good Friday.
The Demotech financial rating firm announced it has downgraded FedNat’s financial stability rating from “A exceptional” to “S Substantial.” The rating indicates that the Sunrise, Florida-based insurer still has substantial resources and stability, and is not in imminent danger of collapse, according to Demotech President Joe Petrelli.
But many mortgage lenders won’t accept less than an exceptional rating. An “S” rating is not recognized by Fannie Mae and Freddie Mac, the government-sponsored purchasers of mortgages.
“That’s a big deal, really,” one Florida insurance executive said Monday. “The whole homeowners’ market exists because of mortgage lending.”
“Our ‘S’ rating is a pretty decent rating,” Petrelli said. But he agreed that if primary lenders won’t accept it, “that could cause FedNat some issues going forward,” he added. “And it might complicate their reinsurance situation.”
Petrelli said the downgrade came partly as a result of losses in Louisiana and Texas, after a massive winter storm and Hurricane Ida in 2021. Demotech’s financial data also shows that FedNat had adequate reserves in only one of the last five years. The carrier has reported about 168,000 policies in force in Florida at the end of the third quarter last year.
The publicly traded company’s CEO, Michael Braun, could not be reached for comment Monday.
When FedNat announced last November that it was pulling out of Texas, Louisiana and other states, a financial analyst called it a “necessary move” for the company. Since then, the carrier has been hit with other bits of negative news.
FedNat’s chief operating officer, Patrick McCahill, resigned at the end of 2021. This week, the Louisiana insurance commissioner announced it plans to fine FedNat $173,000 for failing to investigate and pay claims in a timely manner.
And earlier this month, the Nasdaq stock exchange notified FedNat’s holding company that it was out of compliance because it did not file its 2021 10-K annual report on time. The company said it needed more time to complete control procedures and audits. It has until May 31 to file the report.
In an abbreviated financial statement filed in March, FedNat Holding Co. reported a net loss of $103 million for 2021, substantially larger than the net loss for the year before.
The 2021 loss was “primarily the result of higher reinsurance costs and the lack of any income tax benefits in 2021,” the statement explained. “In 2020, we recorded $33.5 million of income tax benefit related to carrying back net operating loss to prior years, as previously disclosed. There was no such income tax benefit this year, as we had fully exhausted our ability to carry back any net operating losses into prior years.”
Major weather events and related impacts were the primary driver of losses in both years, the statement said.
Part of FedNat’s pull-back from other states included shedding its subsidiary, Maison Insurance, which wrote homeowners, mobile home and rental property policies in Louisiana, Texas and Florida.
“The strategic shift that FedNat announced in November to refocus on the Florida homeowners market is proceeding as planned with the orderly runoff of Maison’s insurance operations and the nonrenewal and transfer of FNIC’s non-Florida business,” Braun said in the financial statement.
The Maison runoff should be completed by the end of 2022 and the non-renewal and transfer of the company’s non-Florida business should be mostly done by mid-2023.
“Upon completion of the transition, we expect FedNat to be a financially stronger company, with less volatility, that will be rightsized to our current capital and surplus position, with approximately $450 million of in-force premium exclusively in Florida and approximately $113 million in surplus,” Braun noted.
Demotech’s Petrelli and other insurance industry insiders described Braun as “a good guy” who is quite capable of leading FedNat through Florida’s stormy seas, and said it was unfortunate that the company was hit with the rating change.
“But we have to what we have to do, since the Legislature won’t do what they need to do,” Petrelli said.
He was referring to the fact that Florida lawmakers last month failed to pass significant measures that many say are needed to stem insurer losses due to widespread fraudulent roof claims and extreme amounts of litigation.
Just after Petrelli made the comments, though, Florida Gov. Ron DeSantis announced Monday that he would call a special session for May to tackle insurance reform, according to news reports. The governor said he will issue a proclamation this week with more specifics.
The announcement came a few days after state Sen. Jeff Brandes said he has gathered enough lawmaker signatures to force the Florida Department of State to formally poll legislators on the need to call a special session on insurance.
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