FedNat downgraded, posing another threat to Florida’s insurance ecosystem

U.S. primary insurance carrier group, FedNat Holding Company, had its main insurer entity, FedNat Insurance Company, downgraded on Friday, after Demotech took away its vital ‘A’ rating.

FedNat Insurance Company now only has a Demotech Financial Stability Rating (FSR) of ‘S’ (Substantial), which may no longer prove a sufficient measure of credit worthiness for insuring mortgaged properties in the state of Florida.

FedNat is one of the catastrophe exposed property insurance specialists that has felt significant pain over the last fives years.

Hurricanes in Florida and along the Gulf Coast, as well as impacts from severe weather and convective storms, have all taken their toll on FedNat, resulting in losses in the last two years and a rethink of the business model.

Last November, the insurer announced a reversal of its strategy to expand into new coastal states, saying it would now revert back to a focus on its home state of Florida, where it felt rates were now more attractive.

It said that losses outside Florida had made its expansion plans untenable, referring to hurricane activity along the Gulf Coast and Louisiana and Texas in the main.

The company then gave some insight into the size of the impacts it had felt, when it became clear FedNat had ceded some $562 million of gross catastrophe losses to its reinsurance partners in the third-quarter of 2021.

The insurer then blamed reinsurance costs for some of its pain, when announcing its second consecutive annual loss for 2021.

Those reinsurance costs are unlikely to get any easier to bear in 2022, given the significant recoveries made last year and the hardening of the market, plus the fact FedNat has refocused its business on Florida, where many reinsurers are currently pulling-back.

All of which suggests FedNat was facing a challenging situation, one that Demotech has clearly acknowledged in the rating downgrade on Friday.

Demotech President Joe Petrelli told the Florida Sun Sentinel newspaper that FedNat had been hit by weather losses in Louisiana and Texas that had dented its capital enough to cause a rating downgrade to ‘S’ Substantial.

However, he implied FedNat has access to capital to support its new Florida-focused business model, adding that “upon securing the necessary level of capital, FedNat should be positioned to request a re-evaluation,” referring to the rating.

The issue for FedNat is that with a rating now below ‘A’, mortgage guarantors Fannie Mae and Freddie Mac won’t accept its policies any more.

That means FedNat is no longer an option for a homeowner looking for insurance alongside a new mortgage loan.

But perhaps worse for the carrier, it could mean existing mortgage holders that have a FedNat policy on the property may need to look elsewhere, if not now then definitely at a renewal, if FedNat hasn’t made a rating recovery by then.

All of which makes recovering the ‘A’ Demotech rating vital and time is of the essence for that, with reinsurance negotiations already underway for many Florida carriers.

A Demotech rating is a key consideration for reinsurance providers, so FedNat’s losing its ‘A’ could hinder negotiations, or even make some reinsurers less-inclined to back the company this year.

Major carriers getting downgraded pose a threat to Florida’s insurance ecosystem, as if FedNat cannot regain its ‘A’ rating it is hard to see how it could carry on as a viable entity.

That could mean insolvency and somewhere north of 175,000 policyholders in Florida looking for a new insurance home, many of which would end up with Florida Citizens, adding further pressure to the insurer of last resorts’ finances.

With Florida’s insurance market already “running out of road” because of the litigation crisis there, a major carrier like FedNat failing would be another significant blow.

It might also be considered notable that insurtech Kin made a surplus injection to sustain its rating recently.  But FedNat has seemingly been unable to avoid the downgrade, which you’d think would have been preferable if the capital was readily available.

Update: FedNat said it is working towards a resolution of the downgrade situation.