Rate increases have made the Florida homeowners property insurance market attractive again, according to primary carrier FedNat, which has now decided that losses outside the state have made its expansion plans untenable, so is reverting to only writing business in Florida again.
FedNat was one of the insurance carriers that sought expansion and diversification outside of Florida, in an effort to stabilise its results and grow its business.
At the time, around 2013, Florida’s insurance market was seen as dysfunctional at best and almost all of the major homeowner carriers looked outside it, for another source of catastrophe exposed coastal property risk.
But that hasn’t gone so well in recent years and now FedNat has acknowledged that the expansion hasn’t worked, as its business and capital has remained pressured by elevated catastrophe loss events.
Causing it to announce a reversal of its expansion plans, which means it will return to refocus on the Florida homeowners insurance market and exit all non-Florida markets.
There are two factors that make FedNat more positive on Florida right now.
Firstly the legislation designed to slow assignment of benefits (AOB) and reform a lot of the legal handling of such cases against insurers.
These had been costly and driven huge loss adjustment expenses and loss creep over the last decade or more, but the reforms are hoped to at least minimise the effects of a litigious property market.
More importantly though, it is rate that is the main driver for FedNat’s return, as it now believes Florida property insurance is better (more adequately) priced than other states, it seems.
Michael H. Braun, FedNat’s Chief Executive Officer, explained the shift in strategy, “The geographic expansion strategy that FedNat launched in 2013 to write homeowners insurance in coastal markets outside of Florida, and then accelerated in 2019, was well-intended given the challenges we were facing in the Florida homeowners market at that time. The acquisition of Maison, and to a lesser extent, the expansion of FNIC’s non-Florida book, ended up being significantly challenged due to the unprecedented number of catastrophe weather events that affected Texas and Louisiana over the past 15 months, coupled with the hardening reinsurance market that began in mid-2019, after our announcement of the acquisition.
“The impact of these significant catastrophe weather events has put a strain on FedNat’s capital position and further action is now appropriate.
“We are therefore exiting the non-Florida markets and refocusing on the improving Florida homeowners market, where there has been some legislative reform, and more importantly, we have taken rate of approximately 70% in FNIC and approximately 50% in Monarch National Insurance Company (“MNIC”) over the past four years. As a result, we believe now is the right time to focus on writing policies in Florida, where FedNat continues to have significant market share, strong underwriting and claims handling capabilities, and strong agent relationships.”
FedNat is going to run-off its Maison Insurance Company operations, which underwrote a lot of its Louisiana and Texas business, with non-renewals beginning in 2022 for those states.
In addition, the business that MGA SageSure originated for FedNat will now be supported by other carriers, the insurer said.
FedNat injected $20 million of capital into its FedNat Insurance Company at September 30th, but won’t inject any additional capital into Maison now.
It says it has around $40 million of non-insurance company liquidity heading into the fourth quarter of 2021.
Braun continued to explain the path forwards for FedNat, “FedNat has communicated with Demotech about our intent to refocus our operations on the Florida market and appreciates the constructive analysis and dialogue maintained through a challenging period of time. Demotech has informed FedNat that it is withdrawing its rating from Maison, which we believe is appropriate at this time, while the ratings of FNIC and MNIC are independent of such action.
“The process of running off the Maison book and transferring the SageSure policies is expected to take approximately 18 months to complete, resulting in a financially stronger company with approximately $450 million of anticipated in-force premium exclusively in Florida. We expect the benefits of this transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses. We will of course continue to provide quality service to all of our policyholders throughout the runoff period.”
It’s an interesting reversal in strategy and one that perhaps may not have been so obvious had Florida been hit by more severe hurricane losses over the last few years.
If thinly capitalised cannot survive in Texas and Louisiana, it’s hard to see how better pricing in Florida would make a business more sustainable if that state also experienced a few more multi-billion industry loss storms.
One thing that does come to mind though, is the opportunity for a company like FedNat to achieve significant growth in Florida through the expected depopulation of Florida Citizens.
That may mean the company can pare back its business model to the Florida focus, growing its book with the help of efficient reinsurance capital.
But whether that too will be tenable after the next major hurricane strikes the Florida peninsula remains to be seen.
FedNat has actually shrunk its Florida book, but sees premiums from the state as steady thanks to consecutive rounds of rate improvements.
The insurer fell to a loss for Q3, with a combined ratio of 165.4% on the back of the catastrophe losses, largely due to hurricane Ida it seems, but reinsurance helped the carrier, especially its quota shares.
Is Florida really that much more attractive an underwriting location than Louisiana and Texas right now? Time and hurricane activity will tell whether this shift can save FedNat’s business and help it sustain its business.