NEW: South Florida home insurer hit with ratings downgrade

With the heart of hurricane season looming, a South Florida home insurer that recently had more than 20,000 customers faces a ratings downgrade from Demotech Inc.

Formerly A-rated, Sawgrass Mutual Insurance Co. of Sunrise is now listed as “licensed,” meaning only that it is licensed by state officials but does not qualify for higher ratings from Demotech.

It’s another troubling sign in a state with the nation’s highest insurance premiums, where many national insurers have pulled back and smaller, untested companies have stepped in.

On the eve of hurricane season in May, Mount Beacon Insurance Co. went out of business and about 22,000 of its policies were transferred to Florida Specialty Insurance Co.

The action with Sawgrass was necessary despite a number of “potential transactions” under negotiation that involve the firm, a Demotech statement said.

Demotech president Joseph L. Petrelli said in a statement, “The Company filed its initial year-end 2016 financial statement, reporting surplus in excess of $20 million, in a timely manner.  The Company secured an effective reinsurance program prior to storm season.  The focus of the Company was to identify suitors and negotiate a transaction that was favorable to their policyholders rather than write additional new business.”

Attempts to reach insurance company officials for comment late Monday were not successful.

The deadline for an independent audit passed without Demotech receiving a copy, the ratings firm said.

“The second quarter 2017 financial statement, presented to us on August 16, 2017, and a revised year-end 2016 financial statement, present surplus and other financial metrics at levels that no longer support” its previous rating, Demotech said. “Concurrently, management has not communicated the most recent status of negotiations by the Company.”

 

Florida insurer Mt. Beacon closes its doors, policies taken over

A start-up player in Florida’s home insurance market, Mount Beacon Insurance Co., is going out of business and about 22,000 of its policies have been transferred to Florida Specialty Insurance Co., the latter firm’s CEO said Monday.

Call it a sign of the challenges facing consumers in Florida, where many big national insurers have largely stopped writing new business and a host of new and smaller competitors have stepped into the fray.

The Palm Beach Post reported trouble finding Mount Beacon’s headquarters less than a year after its 2014 founding. It drew attention for making offers to take customers of state-run Citizens Property Insurance Corp. who lived in mobile homes — an unconventional target for such offers. At the time, there was no company sign at the company’s official Pinellas Park address in state corporate records and an employee at the front desk had never heard of the CEO.

By the start of 2015, Mount Beach had 31,871 customers, including 1,624 in Palm Beach County. The most recent statewide customer count available to The Palm Beach Post’s insurance guide was about 37,000.

Now the policies are in good hands, the new stewards say.

“Agency and policyholder information can now be found on the Florida Specialty Insurance Company website, www.floridaspecialty.com,” said Susan J. Patschak, chief executive officer of Florida Specialty Insurance Co. in Sarasota. “Customer service, underwriting, billing and claim service numbers have not changed and can be found on the Florida Specialty website as well.”

After the additional policies, Florida Specialty has about 50,000 customers in Florida, she said.

The manufactured home business that Mount Beacon took out of Citizens was profitable before reinsurance costs, referring to back-up coverage insurance companies buy to make sure they can cover claims after a disaster, Patschak said.  It was these costs that made this profitable underlying business unprofitable, she said.

As of May 15, 2017, Mount Beacon Insurance Co. no longer had any active policies and its remaining assets will be merged into a firm based out of state, Oakwood Insurance Co., officials said.

Florida Specialty Insurance Co. said it received notification from ratings firm Demotech Inc. on March 10 affirming Florida Specialty’s Financial Stability Rating of “A (Exceptional).” Demotech plays an important role in helping determine acceptability in the mortgage lending marketplace for smaller companies not necessarily rated by other ratings firms.

The Palm Beach Post reported in March that Mount Beacon was among several Florida insurers that merged, changed ownership, shifted customers to new hands or added new investment after threatened ratings downgrades from Demotech. The return of hurricanes to Florida in 2016 after an 11-year pause and trends in non-catastrophe claims placed financial pressure on many of the state’s fledgling companies, Demotech said.

From a Demotech release in March:

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.”

 

 

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.

 

Sen. Nelson: Demotech downgrades risk mass FL homeowner ‘disaster’

U.S. Sen. Bill Nelson urged federal officials Tuesday to take any actions necessary to prevent a “disaster ” if mass numbers of Florida homeowners go into default because ratings firm Demotech Inc. lowers safety grades on several property insurers.

U.S. Sen. Bill Nelson, D-Fla.
U.S. Sen. Bill Nelson, D-Fla.

The threatened lower grades from the Ohio-based ratings company could “put thousands of Florida homeowners at risk of defaulting on their home loans,” Florida’s Democratic senator wrote to Steve Seitz, deputy director of the Office of Federal Insurance for the U.S. Department of the Treasury.

“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.”

Nelson continued, “Regardless of the reason, the effects of such a downgrade could be devastating. I urge you to look into the situation and take any and all necessary steps to help stabilize Florida’s property insurance market and avoid such a disaster.”

A Treasury spokesman did not immediately respond to a request for comment.

Demotech officials have said guidance on 57 Florida property insurers is under review after  2016 storms and continuing water-claims problems, and an unspecified number face ratings downgrades in March.

Here is the text of Nelson’s letter:

February 21, 2017

 

Mr. Steve Seitz

Deputy Director, Office of Federal Insurance

United States Department of the Treasury

1500 Pennsylvania Avenue, NW, Room 3312

Washington, DC 20220

 

Dear Deputy Director Seitz,

 

I am concerned about recent developments related to Florida’s property insurance market. According to news reports, Demotech, Inc., an Ohio-based insurance-rating company, is threatening to downgrade the financial stability ratings of several property insurance companies in Florida from A to B. Such a move could put thousands of Florida homeowners at risk of defaulting on their home loans.

 

Fannie Mae and Freddie Mac require borrowers to buy insurance from companies with at least an A rating. 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.

 

Demotech, Inc. cites several reasons for a potential downgrade, including an increase in water-damage claims and abuse of a practice known as assignment of benefits. Regardless of the reason, the effects of such a downgrade could be devastating. If thousands of Florida homeowners are thrown into default through no fault of their own, it could have a disastrous effect on the state’s economy and financial system.

 

I urge you to look into the situation and take any and all necessary steps to help stabilize Florida’s property insurance market and avoid such a disaster. Thank you for your prompt attention to this matter.

 

Sincerely,

Bill Nelson

Update: Asked for comment, Demotech president Joe Petrelli did not directly address Nelson’s letter but offered these comments:

In 1996, when the State of Florida, we were invited by the Department of Insurance, now Office of Insurance Regulation, and the secondary mortgage marketplace to do so.  The Commissioner was Tom Gallagher.  The State needed to address the issue of insurer acceptability in Florida.  They contacted Demotech.  In 1989, Freddie Mac and Fannie Mae had become familiar with us and accepted our Financial Stability Ratings® (FSRs) of A or better.  We developed a procedure.  Our procedure met the needs of the State of Florida, insurance agents, insurance companies, consumers and was acceptable to the secondary mortgage marketplace.

 

Since that date, Demotech has reviewed and rated insurers countrywide.  We have publicly noted how the AOB matter has been problematic to a financial review of insurers in that past history on claims is no longer indicative of future claims activity due to the AOB phenomenon.  The Johnson and Sebo decisions caused further concern about the capability of past loss experience to be indicative of future loss experience.  Given that we have been actively reviewing and rating carriers in Flor8ida since 1996, we have been transparent in our concerns about past being prologue to the future.

 

As carriers assigned an Financial Stability Rating (FSR) one notch below A, S, Substantial have performed well over time, I first approached Fannie and Freddie in April 2012 to accept our FSRs of S or better as opposed to FSRs of A or better.  The S rating is an excellent rating.  In the secondary mortgage marketplace it has been accepted for title underwriters since 1994.  It is accepted by numerous insurance agent’s errors and omissions insurers.  it has withstood the scrutiny of several due diligences.  Since approaching Fannie and Freddie in April 2012, I have had additional communication as recently as February 2, 2017.

 

Carriers assigned an FSR of A must meet or exceed our criteria.   This said, Demotech believes, and others agree, that our FSRs of S, at one notch below A, identify financially stable insurers that are well above average.  As to carriers in Florida, every carrier that we review and rate has been made aware of our opinion on their financial position at least quarterly and since the fall of 2016, on a regular basis.  We have advised carriers of what they need to do to sustain their FSR of A.  However, given the impact of AOB, the potential impact of Johnson (9/29/2016) and Sebo (12/1/2016) on the insurer operating environment in Florida, subsequent to the financial impact of a series of storms during 2016 including Hermione and Matthew, each of the 57 carriers we review may not meet the criteria for an FSR of A when we review their year-end 2016 published reports.

 

In summary, Our criteria associated with an FSR of A remain intact.   One notch below A, an FSR of S is assigned to a well above average company.  We have been communicating with the GSEs and insurance agents errors and omissions insurers since April 2012 on this matter.   We have many E&O carriers on board with the FSR of S.

Update:  “The Treasury Department does not comment on Congressional correspondence,” a spokeswoman said.

Hurricane season: Are FL insurers ready? Fitch, Demotech sound off

Hurricane Wilma, 2005.
Hurricane Wilma, 2005.

Florida insurance companies are “locked and loaded” for hurricane season June 1, one ratings firm says, while another emphasizes the market is full of small, untested companies.

“Never in the history of the state of Florida has the domestic market had more or better reinsurance protection,” said Joseph L. Petrelli, president of Demotech Inc.

His statement Friday refers to back-up protection that companies buy, often from offshore firms, to help them pay claims.

“Carriers are purchasing protection at unprecedented levels to protect consumers from not only a large storm, but a series of storms,” he said.

But Fitch Ratings lists that same reliance on third-party reinsurance as a reason for caution.

Many Florida-based companies “are unlikely to achieve ‘A’ category” in Fitch Insurer Financial Strength ratings, the ratings firm said in a statement. “Limiting factors that influence ratings include relatively small size and scale, concentrated product and geographic profiles, heavy reliance on third-party reinsurance and concerns regarding capital adequacy given catastrophe exposure,” the Fitch statement said.

“It’s not a question of if these Florida homeowner specialists will be tested by a hurricane but rather when the next catastrophe strikes will they be prepared to handle a significant increase in claims volume,” said Fitch’s Christopher Grimes.

The tone is different with Demotech about what happens if the state’s decade-long break from a hurricane hit comes to an end.

“No one knows when the next hurricane will make landfall,” Petrelli said. “However, Florida’s domestics are ready to respond.”

Explore The Palm Beach Post’s exclusive property insurance guide to see how your insurer stacks up