Two Florida carriers likely to head into receivership within days

Sources tell us that two Florida primary insurance carriers are likely to head into receivership and be deemed insolvent within a matter of days, with the regulator set to act perhaps as soon as Monday.

The Florida Office of Insurance Regulation has been keeping a close watch on a number of Floridian carriers, as stresses of recent years hurricanes, storm losses through 2020, accelerating non-catastrophe water losses, alongside issues related to the litigated claims environment in Florida, have all conspired to weaken some carriers considerably.

Rising reinsurance rates are another factor said to be causing additional stress for some Florida insurance carriers and the inability to affordably secure as much reinsurance as they require is now threatening the stability of some business models, we’re told.

The two carriers in question are said to be Capitol Preferred Insurance Company and Southern Fidelity Insurance Company, both of which have filed for significant rate increases in recent months in an effort to make the premiums written pay for the costs of running their businesses.

It seems that even with rate any gains made, their business models are on the verge of being deemed untenable by the Florida Office of Insurance Regulation and our sources said the regulator is likely to put the pair into receivership on Monday.

It’s yet another sign of the stressed nature of the Florida property insurance market and the fact it has relied on cheap reinsurance through recent years just in order to stay viable.

Unless the litigated claims issue is resolved, it is hard to see how these smaller carriers in Florida remain viable writing catastrophe exposed property risks, perhaps hinting at the need for more efficient models to emerge that can directly connect these primary property risks with more efficient capital.

Of course, even ILS investors, or other alternative reinsurance capital players, won’t want to support portfolios that are facing severe issues from non-weather water and litigated claims, so lower-cost capital isn’t always an answer.

What happens to the policyholders of these insurers if they are deemed insolvent remains to be seen, but there is a chance of them losing coverage.

Capitol Preferred had already shed almost 24,000 policies just in advance of the hurricane season, with the regulators approval. The regulator called that measure “extraordinary” at the time.

The Tallahassee based insurance company is also the owner of Southern Fidelity, with the pair having almost 120,000 policies in force a year ago, and it has been under corrective measures with extra regulatory oversight as it tries to make a recovery plan in recent months.

Just two weeks ago, rating agency Demotech withdrew its Financial Strength Rating for Capitol Preferred, which may prove to have been a sign of what is to come.

We understand last minute efforts to save the insurers from being put into receivership continue, but our sources said they believe insolvency is the only option (aside from a rescue by a new investor) and this is likely to be announced as early as Monday.

The strains for some Florida primary insurers are likely to continue as reinsurance rates continue to rise.

If the current hardening of the market persists right through to the June 2021 reinsurance renewals the situation may get even more challenging for some.

More carriers are at-risk of insolvency currently and further efforts to remediate business plans are underway in the state, to avoid regulatory action of this kind.

There is also a chance all of this leads to even more growth for Florida Citizens, as it picks up shed policies over the next year.

Update: Hudson Structured Capital Management announced that it has agreed to take a majority stake in Southern Fidelity.