Lighthouse the first to lose Demotech rating, as Ida losses weigh

Lighthouse Property Insurance Corporation has the unfortunate title of becoming the first coastal property insurance specialist to lose its rating as the 2022 hurricane season approaches, as Demotech withdrew its Financial Stability Ratings citing a reduced capitalisation due to losses from Ida.

Demotech has recently warned that rating downgrades and withdrawals could be coming for a number of insurers, in particular the Florida focused, saying that reform of that property market is required.

Lighthouse is the first Florida writer to be affected it seems, although it is the impacts of a storm that affected Louisiana heavily last year that has seemingly driven the ratings withdrawal.

Demotech withdrew the Financial Stability Ratings (FSRs) it had previously given to Lighthouse Property Insurance Corporation and its subsidiary Lighthouse Excalibur Insurance Company yesterday.

Lighthouse had tried to sustain its surplus levels with a capital raise late last year, but it seems this has not been sufficient.

Joseph Petrelli, President of Demotech, explained the reasoning behind the rating withdrawal, saying, “Despite a substantial capital contribution in the fourth quarter 2021, the operating loss in 2021, which reflected the evaluation of losses and loss adjustment expenses associated with Hurricane Ida, resulted in a level of capitalization below what was needed to sustain FSRs at the A level.”

It is the first rating withdrawal of 2022 for Demotech and given the driver is a decline in capitalisation, this could be ominous for other Florida and coastal focused property insurers as the wind season nears.

Lighthouse had a strong reinsurance program with significant participation from the insurance-linked securities (ILS) market, with some leading ILS market players having backed its renewal last year.

With a challenging Florida reinsurance renewal now approaching, there were no guarantees how easy a renewal would be this time around and almost certainly Lighthouse would have faced a significant uplift in costs.

With reduced capitalisation and hurricane Ida losses and loss adjustment expenses still weighing, Demotech will have had no choice but to withdraw the ratings at this time.

Whether Lighthouse can recover remains to be seen. If it can’t, it won’t be the first insurer to go into receivership that operates in the Florida market and likely won’t be the last to face similar rating and capitalisation challenges this year.

Lighthouse was one of the carriers we highlighted as likely to exhaust their reinsurance tower after hurricane Ida, which it seems was likely the case as loss development from the storm hit its capital base.

It’s not as if Lighthouse wasn’t warned either, as Demotech had highlighted the insurer as one of a number needing to improve its results in 2021.

More warning signs were there, as Lighthouse suspended writing new policies in Florida in February 2022, saying that it needed to manage its reinsurance placement options this year.

Lighthouse had somewhere north of 170,000 property policies in-force and is certain to now be identifying options to raise capital, or find another solution to revive its fortunes. The insurer had been seeking rate increases in Florida prior to suspending writings there, which was also cited with reinsurance as a driver.

Insurers operating in Florida and the coastal US southern hurricane exposed states are facing significant challenges this year.

It’s expected other rating downgrades and withdrawals will come before the June reinsurance renewals, with the only question now being how numerous.

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