FedNat shows Florida still creeping, as it hardens reserves for recent years

Florida and regionally focused primary insurance group FedNat Holding Company has provided further indication that catastrophe and weather losses in Florida are continuing to send loss creep into the industry, as it has hardened its reserves for current and prior year events.

FedNat announced a range of items yesterday, including current year catastrophe claims that will impact its fourth-quarter 2019 results, but also ongoing issues related to catastrophe losses from 2018 and 2017.

The company reports that it will suffer pre-tax catastrophe claims amounting to $4.5 million, after accounting for reinsurance and profit-sharing for Q4 2019.

Gross, its catastrophe claims amounted to $6 million, including $3 million from FedNat’s Florida property business and $3 million from non-Florida property business.  These catastrophe claims are related to tropical storms Olga and Nestor as well as other PCS named catastrophe events that struck Texas, Florida and other states during Q4.

FedNat has also added some significant contingency to its reserves, saying it expects to report $12 million (pre-tax) of adverse prior year reserve development, mainly driven by $8 million in non-core lines of business, which includes $5.5 million from commercial general liability business and $2.5 million from automobile business.

On top of that FedNat also expects loss creep within its property related insurance book, anticipating $4 million of adverse prior year reserve development in its core Homeowners line of of business.

This is “primarily related to higher than expected loss tail trends in weather-related claims in the state of Florida for accident year 2018 and prior,” FedNat explained.

So that could include an element of continued loss creep related to 2017’s hurricane Irma and perhaps 2018’s Michael, which could drive some further creep to reinsurance providers if FedNat has any limit left to claim on for those calendar years.

A number of Florida carriers did send more loss creep to the reinsurance market in Q4 2019, largely due to creeping Irma losses.

It’s not just prior year’s though.

Reflecting the fact there is still work to do in Florida to improve the way claims inflation occurs, FedNat has strengthened reserves by $5 million (pre-tax) for its Florida Homeowners line related to the first nine months of 2019 as well.

The insurer said that this is “associated with elevated water claims and the continued impact from Assignment of Benefits (AOB).”

This particular AOB impact was driven by an “influx of claims, and subsequent litigation costs that occurred prior to the enactment of AOB reform on July 1, 2019,” FedNat explained.

Which suggests that there could be more of this to be dealt with by insurers, as this influx of claims prior to the AIB reforms being enacted is likely to have affected the entire market.

Companies like FedNat and their reinsurance providers will be hoping that the AOB reform stems the flow of claims inflation and fresh claims, reducing the flow of adverse loss development and prior period impacts that have been seen in Florida in recent years.

“The Florida homeowners claims environment remains challenging in terms of litigation frequency and severity. As a result of these trends we have significantly strengthened our reserves at this time,” explained Michael H. Braun, FedNat’s Chief Executive Officer.

“We are continuing to proactively take additional rate in Florida, and will remain vigilant in our underwriting appetite within Florida until we see the trends reverse or our rate actions catch up to the litigation trends. In the near term our focus remains on expanding our presence in more profitable non-Florida markets to position our company for improved financial performance in 2020, and long-term profitability profile enhancement. Our balance sheet remains strong and will enable us to continue our commitment to prudent underwriting, and to return value to shareholders through our dividend and share repurchase programs.”