Ratings downgrade imperils another Florida insurer

Article Courtesy of Florida Politics

By Drew Wilson

Published April 26, 2022


The downgrade could put tens of thousands of Floridians out of compliance with their mortgage lender.

There’s trouble on the horizon for another company that writes homeowner’s insurance policies in Florida.

FedNat Holding Company, which offers insurance under the name FedNat Insurance Company, had its stability rating downgraded from A to S by Demotech, a consulting company that rates the financial health of insurance companies.

Demotech defines an A rating as “exceptional” and says it indicates a company is expected to have a positive surplus “regardless of the severity of a general economic downturn or deterioration in the insurance cycle.”

An S rating — or “substantial” — is one rung down and companies in earning the rating, while not on the brink of collapse, are less able to handle turbulence in the market or broader economy.

Still, the creditworthiness of S-rated company isn’t good enough to satisfy some mortgage lenders, including Fannie Mae and Freddie Mac. That leaves many current customers with no option but to seek coverage elsewhere unless FedNat can regain an A rating.

FedNat’s policy portfolio in Florida and other states has proved to be a drag on its financial health, causing the company to incur losses for the past two years. Losses in Louisiana and Texas were cited by Demotech when it issued the downgrade.

The company ceded $562 million in losses to its reinsurance partners in the third quarter of last year and has cited reinsurance costs as a major factor in posting back-to-back annual losses. Its focus on Florida compounds the problem.

The Sunshine State market has become increasingly turbulent, with major insurers such as St. Johns and Avatar entering receivership and others issuing nonrenewals or exiting the state entirely.

If FedNat does not regain an A rating, as many as 175,000 Florida policyholders could be searching for a new insurer, likely ending up with the state-backed Citizens Property Insurance Corp., which has seen its policy count explode in recent months.

Citizens was created in 2002 and intended to be Florida’s “insurer of last resort” for homeowners who couldn’t find affordable property coverage in the private market. Private insurers, however, often complain that its lower prices — Citizens’ rates can’t be increased more than 11% per year — funnel homeowners into the company.

If Citizens’ ability to pay claims is overwhelmed by a large hurricane, assessments can be placed on non-Citizens’ homeowners, automatically hiking insurance premiums for Florida homeowners. That means the more risk Citizens takes on, the greater the risk of assessments becomes.

Gov. Ron DeSantis plans to call another Special Session next month to address the insurance market’s woes, though it is unclear what lawmakers’ solution will look like.

A potential fix floated in the Regular Session failed over concerns low- and fixed-income homeowners wouldn’t be able to afford the deductible to repair their roofs. And it’s likely many solutions would lead to more rate increases for homeowners in the short term.