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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.
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