Florida insurers keep A grades after consolidation, Demotech says

Ratings agency Demotech Inc. said Thursday several Florida insurers kept A grades amid a flurry of moves to shore up their financial strength but warned future downgrades remain possible.

Insurers under pressure added about $200 million in loss reserves and $155 million in capital contributions, Demotech said in a statement.

The Ohio-based ratings company warned in the aftermath of 2016 storms and continuing problems with Florida claims where contractors and attorneys control benefits that it remains “likely that insurers may face downgrades in the future.”

In February, U.S. Sen. Bill Nelson urged U.S. Treasury officials to take any actions necessary to prevent a “disaster ” if thousands of Florida homeowners go into default because Demotech lowered safety grades on several property insurers.

“Fannie Mae and Freddie Mac require borrowers to buy insurance from companies with at least an A rating,” Nelson wrote. “If those companies are downgraded to a B rating, thousands of Florida homeowners who currently have insurance policies with those companies could suddenly find themselves in default on their home loans.”

In the weeks ahead of Thursday’s announcement, several Florida companies have taken action to strengthen their financial positions.

Avatar Partners LP, the parent company of Tampa, Fla.-based Avatar Property & Casualty Insurance Company, announced earlier this month it agreed to acquire Tallahassee, Fla.-based Elements Property Insurance Holdings LLC and subsidiaries including Elements Property Insurance Co.

Avatar said it will acquire approximately $65 million of Florida residential premiums and access to more than 500 independent insurance agents in the state.

“We are really excited about this opportunity,” said Avatar chairman John Adhia.

Elements president Bob Ricker said, “We have assembled a strong team of professionals since our founding in 2013 and see many benefits for our team and policyholders by becoming part of Avatar.”

Tampa-based Prepared Insurance Co. announced an agreement Thursday to welcome new ownership.

In February, Demotech said its guidance on 57 Florida-based property insurers was under review in the wake of the 2016 storms and problems with costly non-catastrophe claims represented by contractors and attorneys who are assigned insurance benefits by consumers. An unspecified number of insurers could be downgraded in March, Demotech warned, later saying the revised ratings would be released by March 16.

Demotech plays a key role in rating Florida-based insurers for what amounts to acceptability in the mortgage market, including smaller companies not necessarily rated by older, traditional agencies.

At the time, Demotech officials fielded multiple questions about whether they expect lending authorities to accept mortgages covered by insurance companies who get less than an A rating.

“The short answer is I don’t know,” said Demotech president Joe Petrelli.

Full Demotech release:

Columbus, Ohio, March 16, 2017- Two facts underlie Demotech’s most recent efforts to stabilize the property insurance marketplace in Florida.  First, the unresolved and ongoing utilization of assignment of benefits (AOB) in Florida is unlike any other situation in the US.  This unique situation has affected consumers through an increase in annual premiums due to the unusual severity of claims associated with AOB and created a small number of vendors, attorneys, and third parties that have prospered.  Second, the operating environment is such that insurers cannot rely on historical operating results to the extent that they have in the past due to AOB, the impact of the Johnson and Sebo decisions, as well as the Florida Supreme Court decisions involving the reversal of claims procedures, protocols, and practices.  In an industry where past is prologue of the future, this is extremely detrimental to efficiently operating an insurance company.

In response to these and other issues, Demotech withdrew its guidance on Florida’s property insurance writers and undertook a comprehensive effort to review the financial statements and business models of fifty-seven carriers to determine if they continued to meet or exceed the objective financial criteria associated with the assignment of Financial Stability Ratings® (FSRs).  After months of discussion, data gathering, analysis, and finally a review of the published year-end 2016 financial statements, we offer the following observations and affirmation of FSRs.

In the aggregate, the carriers that we review and rate in Florida added approximately $200 million in loss and loss adjustment expense reserves as a response to our request to strengthen claims reserves in light of the deterioration in the operating environment as well as approximately $155 million to policyholders’ surplus (net worth) through capital contributions or operating results.  This additional $355 million to benefit policyholders or claimants indicate the insurers’ recommitment to Floridians and financial stability.

In certain cases, Demotech reviewed rate level information and analyses prepared by credentialed actuaries intent on determining whether insurer rate structures were not excessive nor inadequate.  In an operating environment in transition, there is no substitute for a realistic rate level.  The overwhelming majority of the carriers reviewed appeared to have the situation under control.   This is critical because a realistic rate structure is a necessary component of the successful implementation of a business model.

Based upon our review of information including year-end financial statements, our interpretation of the deterioration of the operating environment in Florida, and discussions with rated clients, we have affirmed the FSRs of the carriers as appropriate and updated our website.  Due to recommitments and recapitalization to meet the requirements of maintaining an FSR of A or better, downgrades have been largely avoided at this time.  However, in the longer run, absent meaningful improvement in the AOB situation, it is likely that insurers may face downgrades in the future, consumers may face higher and frequent rate increases, and investors who would otherwise capitalize or fund Florida-based insurance companies will deploy their capital elsewhere.  Whether a property insurance carrier is privately-held or owned by a publicly traded entity, Demotech believes the primary focus of carriers should be adequate loss and loss adjustment expense reserves, realistic pricing in support of a business plan, along with a catastrophe reinsurance program whose horizontal and vertical protection addresses the needs of policyholders and investors by assuring, at a high yet reasonable level of maximum loss, the survival of the insurer.

As the companies have addressed our requests related to capitalization while simultaneously revisiting loss and loss adjustment expense reserve adequacy at year-end 2016, we look forward to completing our review of March 31, 2017, financial statements as well as our reviews of preliminary and final catastrophe reinsurance programs by June 1, 2017.  Although we have affirmed the FSRs of the carriers as appropriate and updated company information on our website, the following company situations required additional discussion as detailed below.

Cypress Property & Casualty Insurance Company

In part due to the significant underwriting loss reported in 2016, the FSR assigned to Cypress Property & Casualty Insurance Company has been revised from A′ (A Prime) to A.  Based on our interpretation of the current operating environment in Florida, FSRs above A are extremely difficult for Florida property writers to achieve and maintain.

Elements Property Insurance Company / Avatar

Although the Company met or exceeded the level of capital and surplus required under the statutes of the State of Florida and management has committed to do so into the future, the Company did not report financials acceptable to Demotech.  The investors controlling the Company opted to sell the Company rather than recommit to Florida or adapt its business model to the emerging operating environment.  Elements Property Insurance Company has been acquired by Avatar Partners LP, the parent company of Avatar Property & Casualty Insurance Company.  Elements will maintain the FSR previously assigned as the pending transaction proceeds towards closure.

Mount Beacon Insurance Company / Florida Specialty

Although the Company met or exceeded the level of capital and surplus required under the statutes of the State of Florida and management has committed to do so into the future, the Company did not report financials acceptable to Demotech.  The investors controlling the Company opted to sell the Company rather than recommit to Florida or adapt its business model to the emerging operating environment.  Mount Beacon Insurance Company has been acquired by Florida Specialty Acquisition, LLC.  Mount Beacon will maintain the FSR previously assigned while the remainder of its policies are moved to Florida Specialty Insurance Company by May 15, 2017.

Prepared Insurance Company / PLW Investments, LLC

Although the Company raised additional capital to meet the level requested by Demotech, the successful implementation of its business model and plan under the current operating environment would have likely required additional capitalization in the future.  In response, the investors controlling the Company recommitted to Floridians by selling a majority interest to PLW Investments, LLC.  The FSR assigned to Prepared Insurance Company has been affirmed based on their current situation, business plan, and management underlying future operations.

About Demotech, Inc.

Demotech, Inc. is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers.  Since 1985, Demotech has served the insurance industry by assigning accurate, reliable and proven Financial Stability Ratings® (FSRs) for Property & Casualty insurers and Title underwriters.  FSRs are a leading indicator of financial stability, providing an objective baseline of the future 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.  Visit www.demotech.com for more information.

 

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