Columbus, Ohio, March 12, 2021: Given the impact of the extraordinary number of natural disasters in 2017, Demotech published a special issue of The Demotech Difference to discuss the impact of disasters on the industry. Strength Through the Storm focused on promises made and promises kept, featuring the resiliency of Demotech rated carriers. An electronic copy is at: www.demotech.com/pdfs/demotech_difference/flexpaper/Strength_Through_The_Storm/index.html .
As bad as 2017 was, the natural disasters that property insurers faced in 2018, 2019, and 2020 made 2017 look like a walk in the park. The six more infamous events of 2018 were the Montecito mudslides, Camp Fire and Woolsey Fire in California, Hurricane Florence, Hurricane Michael, and the flooding in Ellicott City, Maryland.
2019 saw inland flooding across the Central states. There were 14 unique billion-dollar disasters in the U.S., the fourth highest number of such events. 2019, 2018, and 2017 each produced more than a dozen billion-dollar disasters. 2019 was the fifth consecutive year in which 10 or more separate billion-dollar disasters impacted the insurance industry.
Not to be outdone, the 2020 Atlantic hurricane season set another record, 30 named storms, 13 hurricanes, and 6 major hurricanes, more than double the activity of an average season. The 2020 season saw a record number of rapidly intensifying storms (10), landfalling U.S. named storms (12), and landfalling U.S. hurricanes (6). Every inch of the U.S. coast from Texas to Maine was under a watch or warning related to tropical cyclones during 2020.
Unfortunately, 2021 is off to a fast start. Winter Storm Uri was a coast-to-coast event producing snow and ice from the Pacific Northwest to the South, Midwest, and Northeast.
With four years of record setting natural disasters buffeting the United States, a logical question is “what is the status of the property insurance marketplace in Florida, one of the most catastrophe prone geographical areas of the world?” Since Demotech actively reviews and rates carriers writing approximately two-thirds of Florida’s residential property insurance marketplace, we supplement our initial release dated March 5, 2021 with this update on the latest quarterly review of the carriers that we follow that write in Florida’s residential property insurance marketplace.
In addition to being one of the most catastrophe-exposed jurisdictions in the world, two recent analyses of the operating environment of insurers writing residential property insurance business in Florida confirm Demotech’s previously stated position: there is a need for meaningful and substantive tort reform.
Well before these two analyses identified the need for tort reform, Demotech referenced revisions to judicial precedents that resulted in changes in claims procedures, practices and protocols that heavily favored plaintiff attorneys, litigation of routine claims and suits as First Notice of Loss, among others. As such, the need for meaningful and significant tort reform to remedy dysfunctions in Florida’s residential property insurance marketplace and, in turn, moderate the rate of increase in premiums is a return to the normalcy that previously existed in Florida and currently exists in the remaining 49 states and operating jurisdictions associated with the US. In this regard, Florida is an island and not a peninsula.
The conclusions or statements in both analyses should encourage Florida’s legislature to return to a balanced environment protecting consumers from substantial incremental annual increases in insurance premiums associated with the cost of fraud and abuse.
In FLORIDA’s P&C INSURANCE MARKET: Spiraling Toward Collapse, Guy Fraker, cre8tfutures, wrote, in part:
Florida’s residential P&C insurance marketplace faces convergence of existential threats in the form of increasingly unpredictable claims litigation, rising costs of risk capital and its persistently high exposure to natural catastrophe risks. Targeted legislative reforms are needed …
Without intervening public policy solutions, the residential property insurance marketplace will experience an accelerated trajectory of unsustainability. Market conditions will force closures, adverse investment terms, investor lawsuits, market exits, and further consolidations. … Without addressing the challenges … other economic challenges to Florida become magnified, such as recovering from COVID-19, and rebuilding from the next hurricane to hit the state.
A review of The American Tort Reform Association’s (ATRA) 2020/2021 JUDICIAL HELLHOLES indicated that ATRA had placed Florida, a former No. 1 Judicial Hellhole, on its Watch List. While acknowledging Governor Ron DeSantis’ ‘thoughtful and decisive leadership, as he continued to remake the Florida Supreme Court’ through his appointments, ATRA stated that ‘the legislature stalled in its efforts to pass long-sought, meaningful lawsuit reform.’
In addition to the need for tort reform, the natural disasters of the past several years have impacted the cost of reinsurance. In Florida, the cost and availability of reinsurance has been exacerbated by the need for meaningful and significant tort reform. Absent meaningful and significant tort reform to address an operating environment tilted toward plaintiff attorneys, the remedies available to Florida focused property insurers to sustain a Financial Stability Rating® (FSR) from Demotech have included the following:
1. Infuse additional capital to replenish surplus
2. Secure rate revisions that reflect the incremental cost of reinsurance
3. Secure rate revisions that reflect the status quo as to frequency and severity of claims
4. Re-evaluate the Company’s business model and/or plan so as to return to profitability
5. Re-underwrite the current book of business and, to the extent permitted by law, cancel or non-renew policies that are outliers as regards their incremental cost of reinsurance.
These remedies are not mutually exclusive and may be concurrently implemented.
In addition to meeting our financial metrics, absent meaningful and significant tort reform in 2021, carriers will need to possess the financial wherewithal, managerial acumen, and access to capital to implement their business models in a dysfunctional property insurance marketplace.
To recap our affirmations of FSRs on March 5, we affirmed 22 FSRs of Florida focused property insurers who successfully completed our review of year-end 2020 financial information. We also announced the withdrawal of one carrier from our process when the FSR level they could sustain was unacceptable to them. Today, we provide affirmations and a status report on other Florida focused carriers.
As to some of those previously affirmed on March 5, 2021, in recognition of action taken by management over an extended period of time, including such things as a well above average Enterprise Risk Management function, favorable operating results over time, in conjunction with their current capital position, these insurers are trending toward an upgrade in the Financial Stability Rating® assigned.
- American Integrity Insurance Company of Florida, Inc.
- Florida Peninsula Insurance Company
- Homeowners Choice Property & Casualty Insurance Company
- Southern Oak Insurance Company
- TypTap Insurance Company
As to initial quarterly affirmations, the FSRs assigned to the next group reflect their recent acquisition by respected entities that have replenished their balance sheets to provide the capacity to weather the impact of past natural disasters on inception to date operating results, respond to issues that may have arisen related to loss and LAE reserve development, and sustain the staying power of execution of business models so as to avail themselves of the future revenue benefit associated with rate revisions that are approved and in place. The acquirers will also supply managerial acumen to sustain business models focused on future profitability.
Future profitability may require canceling or non-renewing certain policies whose underwriting characteristics generate a disproportionate cost of reinsurance. Equally important, current management and the investor team have advised us that the companies will secure a premium structure consistent with the anticipated loss and LAE levels in the residential property insurance marketplace. We interpret this to mean if there is no tort reform in 2021, incremental costs associated with fraud and abuse will be passed on to consumers through rate revisions.
Although the cost of the rigorous horizontal and vertical catastrophe reinsurance programs necessary to meet or exceed our requirements has not yet been finalized, these carriers and their affiliates now appear positioned to secure an appropriate reinsurance program as required in the next phase of our annual review process.
- Centauri National Insurance Company
- Centauri Specialty Insurance Company
- Weston Insurance Company
- Weston Specialty Insurance Company
- Southern Fidelity Insurance Company
In summary, absent the level of natural catastrophes associated with the record years of 2017 through 2020, as these carriers move forward, we believe they have ameliorated the impact of the operating results reported at year-end 2020 on their balance sheets, are positioned to record and report markedly improved operating results in 2021 that meet or exceed the financial metrics that Demotech deems consistent with carriers assigned an FSR at the A, Exceptional, level as well as successfully address other phases of our annual review process.
The next group of carriers have taken specific actions to enhance results as well as secure and infuse a substantial amount of additional capital to mitigate the cumulative impact of the operating results on their balance sheets. They appear to be positioned to record and report markedly improved operating results in 2021 while concurrently meeting or exceeding financial metrics that Demotech deems consistent with carriers assigned an FSR at the A, Exceptional, level as well as address the upcoming phases of our annual review process.
- American Coastal Insurance Company
- Family Security Insurance Company (an affiliate of UPC)
- FedNat Insurance Company
- Heritage Property & Casualty Insurance Company
- KIN Interinsurance Network
- Maison Insurance Company (an affiliate of FedNat Ins Co)
- Monarch National Insurance Company (an affiliate of FedNat Ins Co)
- Tower Hill Preferred Insurance Company
- Tower Hill Prime Insurance Company
- Tower Hill Signature Insurance Company
- United Property & Casualty Insurance Company
- Universal Property and Casualty Insurance Company
The following carriers have taken specific actions to enhance results as well as secure and infuse capital to ameliorate the impact of the operating results reported at year-end 2020 on their balance sheets. To sustain an FSR at the A level, they must record and report markedly improved operating results in 2021 while concurrently meeting or exceeding financial metrics that Demotech deems consistent with carriers assigned an FSR at the A, Exceptional, level as well as other phases of our annual review process.
- Access Home Insurance Company (an affiliate of Cypress P&C Ins Co)
- Avatar Property & Casualty Insurance Company
- Cypress Property & Casualty Insurance Company
- Lighthouse Property & Casualty Insurance Company
- Lighthouse Excalibur Insurance Company (an affiliate of Lighthouse P&C Ins Co)
- St. Johns Insurance Company
The final group of carriers have taken initial action to enhance results and ameliorate the cumulative impact of the operating results reported at year-end 2020 on their balance sheets while continuing to address longer term needs. To sustain an FSR at the A level, they must record and report markedly improved operating results in 2021 while concurrently meeting or exceeding financial metrics that Demotech deems consistent with carriers assigned an FSR at the A, Exceptional, level as well as other phases of our annual review process.
- Olympus Insurance Company
- Gulfstream Property and Casualty Insurance Company
- Gulfstream Select Insurance Company
Due to singularly unusual circumstances associated with a key member of the Universal Insurance Company of North America team, the year-end 2020 financial statement has not yet been finalized. However, as of this date, we have received information on preliminary year-end 2020 operating results as well as recent affirmations from senior management that published year-end 2020 results will be consistent with the preliminary financial statements submitted to us.
We remind all that an annual review and analysis process is similar to taking a class in college. No one test or grade is likely to be the final grade of the participant. All catastrophe prone carriers that we review, Florida focused or not, are subjected to multiple phases and analyses in any given annual review cycle. The phases may be supplemented to address carrier specific issues or in response to natural catastrophes:
- Now through April 30 Initial reviews of reinsurance programs commence
- Now through April 30 Reviews of catastrophe response programs
- Now through April 30 Reviews of disaster response programs
- Now through April 30 Florida legislature discussed tort reform
- Now through June 30 Reviews of year-end 2020 independent audits
- May 15 to May 30 Reviews of Q1 2021 data and decisions on FSRs
- Now through May 30 Verification/acceptance of reinsurance programs
- August 15 to August 30 Reviews of Q2 2021 data and decisions on FSRs
- November 15 to November 30 Reviews of Q3 2021 data and decisions on FSRs
- January/February 2021 Discussions of anticipated 2021 operating results.
About Demotech, Inc.
Demotech, Inc. was the first firm to review independent, regional and specialty insurers. Since 1985, Demotech has served the industry by assigning accurate, reliable, and proven Financial Stability Ratings® to Property & Casualty insurers and Title underwriters. FSRs provide an objective baseline of the solvency of an insurer. Demotech’s philosophy is to review and evaluate insurers based on their area of focus and execution of their business model rather than solely on financial size. Demotech was the first to review and rate independent regional and specialty insurers. Demotech’s increasing accreditations and acceptances has resulted in its review of more than 400 insurers operating in the US. Visit www.demotech.com  for additional information.