United (UPC) cites uncertainty post-downgrade, despite Citizens arrangement

United Insurance Holdings Corp. has highlighted how it continues to face significant uncertainty after the downgrade by Demotech of its United Property & Casualty Insurance Company (UPC) carrier, despite having been deemed eligible for support via the Citizens guarantee arrangement.

Demotech downgraded United Property & Casualty Insurance Company two notches to “M” last week, putting the carrier at-risk.

The company, United (UPC) highlighted why this puts it at-risk yesterday in a filing, highlighting issues it still faces in Florida, as well as potential issues in other states.

Interestingly, United (UPC) first highlighted the fact this downgrade could “cause an inability for UPC to obtain reinsurance coverage.”

While that’s a considerable risk to its business, given the carrier makes significant use of both traditional and alternative capital backed reinsurance, it seems likely the company could secure more reinsurance when needed, however it may not be on the same terms as at previous renewals.

Reinsurance markets may look for more stringent terms, or higher prices, from carriers that have been downgraded and that is the real risk on the reinsurance front, affordability.

The second risk highlighted is the main one that has been discussed with Demotech downgrades, that it could “cause UPC’s products to be unacceptable to mortgage lenders and prevent agents from selling and servicing UPC products.”

But, as we reported recently, United (UPC) has been deemed eligible for coverage under the recently announced arrangement with Florida Citizens, that will see the residual market guaranteeing claims above FIGA caps for any insolvent carriers.

The Florida Office of Insurance Regulation (OIR) announcing a plan last week to launch a temporary reinsurance arrangement through Citizens Property Insurance Corporation to support any downgraded, but still viable carriers.

We reported more details on that arrangement with Citizens here,explaining that it is more of a guarantee arrangement, than reinsurance, that provides a way for claims above FIGA caps to be covered, to allow a carriers policies to remain in-force even after its downgrade.

But, of course, the Citizens arrangement is only a Florida arrangement and United (UPC) has policies it has underwritten on-risk elsewhere in the United States.

Leading the carrier to explain, “UPC’s policies in the Southeast states of Georgia, North Carolina and South Carolina are covered by a 100% quota share arrangement with HCI Group, Inc. UPC business written in New York is covered by a 100% quota share arrangement with Interboro Insurance Company.

“While UPC maintains these 100% quota share arrangements, we are uncertain whether these arrangements are acceptable for mortgages backed by Fannie Mae or Freddie Mac.”

The Citizens arrangement, that continues to be termed reinsurance even though it really is not, is only for policies in Florida and there are carriers, such as United (UPC), that write business elsewhere and rely on their Demotech ratings for that.

Given the quota share reinsurance is a 100% arrangement, it does seem likely the mortgage GSE’s will approve this as an exception, as a 100% reinsurance arrangement can help carriers avoid losing their ability to maintain policies issued against mortgaged properties.

100% reinsurance agreements are seen as one of the key exceptions for Fannie and Freddie, but the fact United (UPC) has policies outside of Florida does raise another angle of uncertainty over the whole issue and also highlights that challenges in Florida’s property insurance market can easily spill over to affect policyholders in other states.

Of course, the quality of a provider of a 100% reinsurance arrangement is also likely to come into question, should the GSE’s need to look at this.

Read all of our news and analysis on the Florida insurance and reinsurance market.