FedNat has “substantial doubt” it can continue as a going concern

Following its recent ratings downgrade, U.S. primary insurance carrier group FedNat has admitted there is substantial doubt over its ability to continue as a going concern, with a potential fall into receivership or failure to secure reinsurance seen as issues that could be fatal for the insurer.

Rating agency Demotech recently downgraded FedNat’s vital ‘A’ rating and replaced it with a 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.

While FedNat then came out to say it had agreed, along with its subsidiary carriers, to provide the Florida Office of Insurance Regulation (FOIR) with a viable plan moving forwards, a plan alone may not be enough and is no guarantee of its ability to avoid receivership or a default under the terms of its debt, either of which could prove fatal.

In publishing its annual report for 2021 yesterday, FedNat warned it has, “recently concluded that there is substantial doubt regarding its ability to continue as a going concern under Generally Accepted Accounting Principles.”

Making the whole situation more challenging for FedNat is a continuation of severe weather impacts through the first quarter of 2022, which the insurer says may impact its risk based capital and surplus even further.

FedNat warned it expects, “continued underwriting losses in the first quarter of 2022, primarily as a result of new catastrophe weather events occurring late in the first quarter.”

The insurer also said that the downgrade from Demotech will, “impact our ability to obtain excess-of-loss reinsurance for coverage beginning July 1, 2022.”

Without the reinsurance FedNat will not be able to meet regulatory requirements and could also fall into default under its debt arrangements as well.

FedNat also anticipates “increased regulatory oversight” by the Florida Office of Insurance Regulation, as a result of its challenges.

FedNat now needs to supply the Florida Office of Insurance Regulation a plan by April 29th to demonstrate its “ability to secure and maintain a financial strength rating acceptable to the secondary mortgage market, acquire sufficient reinsurance as of its July 1, 2022 renewal, support its existing business via the securing of additional capital, and address its non-Florida losses and policies.”

FedNat is looking at alternatives, around capital raising or restructuring its insurance carriers and books of business, but notes there are no guarantees.

There are a lot of factors playing into FedNat’s future, or potential demise.

We’re aware of investors and bankers that have been discussing a range of capital options for FedNat, as well as run-off options for some of its books.

But so far we’re told there are no concrete plans on the table that would see it recovering its rating particularly quickly.

The next few days are critical for the carrier and also for Florida, given FedNat going into receivership could see another glut of policyholders flowing to Florida Citizens.