Florida carrier performance worsens in 2020, even though hurricanes missed

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Florida’s homeowner’s insurance carriers are struggling with their performance in 2020 and reporting significantly elevated combined ratios despite the fact this year’s hurricane activity largely avoided the State.

florida-beach-imageIn a new report, Fitch Ratings explains that, “Florida homeowners’ insurance specialists are reporting continued performance deterioration and a decline in capitalization levels.”

This is despite a less impactful year from major tropical storms and hurricanes in 2020.

“The most severe losses from the record 2020 hurricane season occurring outside of the Florida market,” the rating agency notes.

But still, “Underwriting losses rose sharply for a group of 28 property/casualty (P/C) insurers focused on Florida homeowners’ insurance business, accounting for 60% of direct state market share for the $10 billion of direct premiums written in the state.”

In fact, the combined ratio for these carriers was on average 131% through the first nine months of 2020, versus a 111% combined ratio fur full-year 2019.

As significant users of reinsurance capital, it seems Florida’s homeowners’ carriers as a result of this will be passing on what could be a greater volume of losses to their reinsurer partners, particularly through quota shares and certain aggregate reinsurance contracts in 2020.

Fitch explains that the performance shift in 2020 remains tied to catastrophe and weather losses from the current year, as reserve development from prior years has been staying relatively steady for both periods.

In fact, Fitch believes that statutory results for the full-year 2020 could actually end up worse than in 2017 when hurricane Irma struck the state of Florida, despite hurricane and tropical storm activity in 2020 largely missing the state.

Once again, the levels of claims litigation and as a result inflation has been a driver for the performance of Florida’s property insurance market in 2020, it seems.

“Carriers cite rapid growth in litigation from non-catastrophe water damage claims as a driver of higher losses, as the pace of property damage claims that result in a lawsuit in Florida remains elevated relative to the broader U.S. market,” Fitch said.

2021 looks better on the premium front, as rates have been rising steadily for Florida homeowner business. But of course results for next year will also be reliant on the hurricane season activity levels, which as we’ve explained could be elevated again, as well as severe weather and the amount of litigation seem related to claims.

But perhaps eroding any profit increases from higher premiums in 2021, Florida’s insurance carriers face higher reinsurance pricing as well.

“Tighter reinsurance market conditions for Florida carriers, along with claims litigation exposures, temper the potential for generating strong returns and rebuilding capital lost in 2020,” Fitch further explained.

Importantly, “Florida homeowners’ insurance specialists with generally modest absolute capital levels continue to rely heavily on reinsurance to maintain a viable business model,” Fitch believes.

This suggests carriers are going to be looking for similar to upsized amounts of reinsurance renewal limit in 2021, as they continue to adapt their programs to buffer against both loss and claims expenses next June.

Underwriting capacity in the Florida market still remains viable the rating agency believes, which is thanks to the private market and also the Florida Hurricane Catastrophe Fund (FHCF).

But, as we explained recently, Citizens has been assuming increasing numbers of policies and the Florida market now risks becoming less private for a time, making access to efficient sources of reinsurance capital increasingly important.

As a result, there will be opportunities for the catastrophe bond market, as well as ILS funds collateralized capacity, to be structured to support the better performing Florida carriers.

However, those carriers that haven’t performed so well may find reinsurance pricing escalating again at the June 2021 renewals, making for tough decisions and potentially less viable business models going forwards.

Summing up its view on the Florida homeowners’ insurance market, the rating agency said, “Florida homeowners’ insurance specialists have business profiles characterized by limited scale and concentration in a volatile product segment. Combined with less favorable risk adjusted capital levels, high dependence on reinsurance and the recent poor profitability trends, the large majority of these companies would be rated below ‘BBB’ by Fitch Ratings.”

Which sounds like a market destined to face ongoing challenges in 2021. But that will also provide opportunities to those who can bring efficient capital to support Florida’s carriers through difficult times.

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