Demotech Reveals Florida Insurer Ratings, Says Market ‘Most Difficult’ in U.S.

April 3, 2020 by

The long-awaited Demotech rating decisions for Florida domestic carriers are in, with many carriers having satisfied necessary steps to avoid ratings downgrades by the financial analysis firm.

After affirming a slew of companies in mid-March, Demotech announced April 2 that the remaining carriers that had yet to be decided were affirmed (see chart) because of enhancements to their business models.

On March 30, Demotech affirmed the ‘A’ financial stability ratings of the following companies: Avatar Property & Casualty Insurance Co., Centauri Specialty Insurance Co., Cypress Property & Casualty, Safepoint Insurance Co., and Tower Hill Signature Insurance Co. Also affirmed were Tower Hill Select Insurance Co. and Omega Insurance Co., after their merger into Tower Hill Signature was approved by the Florida Office of Insurance Regulation on March 25.

Since Demotech sounded the alarm in January that as many as 18 Florida carriers could see downgrades due to deteriorating insurance market conditions in the state, the ratings firm said several actions have been taken: one company was downgraded, one company was acquired by a carrier with an FSR of A; five companies were merged into carriers with FSRs of A, and an additional nine companies enhanced their business models.

The specific actions include:

  • Anchor P&C Assigned an FSR of M – ceased operations
  • Anchor Specialty FSR of A – Acquired by insurer with FSR of A
  • Omega FSR of A – Merged into an insurer with FSR of A
  • Tower Hill Select FSR of A – Merged into an insurer with FSR of A
  • Cypress TX FSR of A – Merged into an insurer with FSR of A
  • Prepared FSR of A – Merged into an insurer with FSR of A

Demotech said other carriers “aggressively enhanced the capability of their business models to respond to the anticipated continuation of jurisdictional and weather-related challenges, the substantial increase in reinsurance costs during 2019, the likely increase in the cost of reinsurance in 2020, and the cost of the Rapid Cash Buildup Program of the Florida Hurricane Catastrophe Fund.”

Those companies include:
  • Centauri Specialty FSR of A, Business model enhanced
  • Centauri National FSR of A, Business model enhanced
  • Safepoint FSR of A, Business model enhanced
  • Gulfstream P&C FSR of A, Business model enhanced
  • Avatar P&C FSR of A, Business model enhanced
  • Capitol Preferred FSR of A, Business model enhanced
  • Security First FSR of A, Business model enhanced
  • Tower Hill Signature FSR of A, Business model enhanced
  • Cypress P&C FSR of A, Business model enhanced

“Our view of Florida’s current residential property insurance marketplace is that the numerous financial and market based criteria that affect Florida residential property insurance have never been more difficult for carriers to navigate since we first rated Florida focused carriers in 1996. The marketplace as well as carrier-specific financial metrics drove the need to consider downgrades,” Demotech said in an April 2 report on its ratings decisions.

The ratings firm said it asked certain Florida insurers to provide projections of their year-end 2019 financials immediately after it finished reviewing third quarter results in November last year. At that time, it also asked those insurers to answer two questions based on the following Florida-specific circumstances: 1. the lingering impact of the judicial activism of the past; 2. the litany of named weather events; 3. increases in the cost of reinsurance, and 4. the specter of additional increases in the cost of reinsurance in 2020.

The questions posed to companies were:

  • Will you continue to be focused on residential property insurance in Florida?
  • If so, based upon the conditions in the marketplace and the operating results that will emanate from those conditions, how will you revise your business model, or otherwise position your company, to combat more of those same conditions in the future?

Demotech said carrier responses used to make ratings decisions included documentation of the company’s jurisdictional diversification, voluntary runoff, marketing existing books of business to other carriers, merging affiliates, or securing assistance.

“The management teams of these carriers have fought the conditions in the most difficult operating jurisdiction in the country to a draw,” the Demotech statement says. “They have addressed the needs of policyholders, investigated and settled claims, paid their employees, producers, and reinsurers, met with us, negotiated with reinsurers for their 2020 programs, and filed timely financial statements in an orderly manner.”

Demotech said it reviewed public and private financial information of companies, including:

  • Managing general agency contract and financial statements, when necessary
  • Holding company financial statements, when necessary
  • Actuarial reports and documents containing appreciably more detail than the actuarial opinion letter, which is a public document
  • Independent audits
  • Anticipated operating results in the form of pro forma financials in a prescribed format
  • Claims adjusting details and reports
  • Litigation services
  • Asset and investment management contracts
  • Disaster recovery plan
  • Catastrophe response plans
  • Catastrophe modelling output
  • A preliminary review of horizontal and vertical reinsurance programs
  • A final review of horizontal and vertical reinsurance programs
  • Review of rate level indications
  • Personal financial statements of key financial supporters.
  • On-site meetings with reinsurers
  • On-site meetings with companies

A” = Unsurpassed A’= Unsurpassed; A= Exceptional;
S = Substantial; M = Moderate

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Why Not More Downgrades?

According to Demotech, the jurisdictional and weather-related challenges are two obvious issues negatively affecting the state’s insurance market. The market also faced a substantial increase in reinsurance costs during 2019 and is likely to see another increase in 2020. The cost of the Rapid Cash Buildup Program of the Florida Hurricane Catastrophe Fund and competition from the state’s insurer of last resort, Citizens Property Insurance Corp., are other challenges.

Demotech said that operating losses over the past several years are the reality, in spite of the [AOB] legislative reforms enacted in 2019.

Just last week, Citizens President and CEO Barry Gilway noted that Florida domestics’ unprofitable results in 2019 not only continued, but worsened. Gilway said Florida domestics ended 2019 with a net underwriting loss of $684 million and negative net income of $340 million, which is more than double the net income loss in the prior two years.

Still, Demotech said carriers willing to sustain an FSR at the A level have “demonstrated how they will fulfill their commitments to Floridians through a revised or enhanced business model.”

Florida-Specific Issues

Demotech said that Florida’s insurance system was designed to mitigate the financial impact of natural disasters was revised on an ad hoc basis and was never designed to address man-made “disasters” such as the judicial precedents created by AOB cases.

While financial ratings are necessary in evaluating the health of the marketplace, they are not sufficient, Demotech said.

“Ratings are a scorecard on what has occurred in the past, and whether or not it is likely to continue into the future. You might think of financial operating results as a lagging indicator of the conditions in the marketplace. One should view the aggregate impact of public policy as the proximate cause of conditions in a marketplace,” Demotech said.

Demotech said it actively reviews more than 400 insurers countrywide and works with state specialists in every jurisdiction.

“We assure you that jurisdictional diversification, voluntary runoff, marketing existing books of business to other carriers, merging affiliates, or otherwise securing assistance to avoid a downgrade rarely occurs outside of the Sunshine State,” Demotech said. “The challenges facing Florida focused insurers is the operating environment that has emerged in Florida.”

In a statement to Insurance Journal on Demotech’s report, the Florida Office of Insurance Regulation said, “Florida is one of the most complex insurance markets in the world. OIR is closely and consistently monitoring the financial condition and operational results of the state’s domestic property insurers. As always, OIR engages in regulatory activities to protect consumers.”

Read Demotech’s Full Report: Demotech Rated Florida Carriers Evolve to Maintain FSRs of A or Better

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