Windstorm focused primary insurance carrier Weston Insurance Company has had its rating withdrawn by Demotech, which market sources suggest may be partly down to challenges it faced in filling out its reinsurance tower at the recent renewals.
Weston Insurance Company is an admitted carrier, operating in Florida, Texas, Alabama, Mississippi and South Carolina, predominantly writing coastal and wind or hurricane exposed property risks in these states.
The carriers’ parent Weston Insurance Holdings Corporation had recently acquired Anchor Specialty Insurance Company, a subsidiary of Anchor Property & Casualty Insurance Company.
Following that, rating agency A.M. Best had placed Weston’s ratings under review with negative implications in January, saying that due the planned combination and plans to add higher debt levels and an increased level of common equity that were needed to reduce financial leverage at the firm came with considerable execution risk. Weston’s ratings remains under review to this date.
But Demotech has seemingly taken some action, with Weston’s financial strength rating withdrawn completely as of June 9th 2020, leaving the insurance carrier unrated currently.
While we’ve heard from sources that this could be related to an inability to secure the necessary reinsurance at the recent renewals, a task that may have become harder thanks to the Anchor entity acquisition as that company had been unprofitable and its portfolio has added significant new risk to Weston that would have needed to be covered, it seems Demotech’s assessment of Weston had not been positive before.
Demotech has a criteria it terms SPEQUELLAE (or Statutory Pretax Earnings Quality Using Emerging Loss and Loss Adjustment Expense Estimates).
This measure is used to put a metric to the integrity of reported statutory pretax income, and Demotech has said in the past that, “A SPEQUELLAE (unadjusted) index below 100 indicates the degree to which initial statutory pretax earnings have tended to be overstated.”
In the case of Weston, the SPEQUELLAE is reported by Demotech to be less than 50.
Demotech has explained before that, “A SPEQUELLAE (unadjusted) index below 85 indicates that over the period subjected to review, the statutory pretax earnings reported by management were optimistic. Earnings were unlikely to be representative of the carrier’s core operations because future adverse L&LAE reserve development eroded the quality of management’s previously reported statutory pretax earnings.”
Hence, it may be a deeper issue, with contributions from the reporting, the added risk from acquiring Anchor, the leverage levels at Weston, and so a much more fundamental issue than solely being related to its ability to secure sufficient reinsurance cover at the renewals.
Interestingly, Anchor Specialty Insurance Company also had its financial stability rating withdrawn by Demotech on the 9th June 2020, the same date as its parent Weston. Anchor also has a SPEQUELLAE rated to be at less than 50, according to Demotech.
Much earlier this year, we explained how the Floridian insurance carriers have been facing pressures and that this could result in a need for more reinsurance, as well as other financing such as private debt.
Weston was clearly a company that would have been looking for increased financing this year, given the status of its income reports according to Demotech’s SPEQUELLAE index score and due to its acquisition of the Anchor entity.
We attempted to contact both Demotech and Weston for comment the day before publication, but no response was forthcoming.
We understand that Weston told its clients and partners that it remains in active discussions with Demotech over its rating and also said that its reinsurance program is still sufficient to exceed regulatory requirements.
It was later reported that Hudson Structured Capital Management Ltd., the insurance-linked securities (ILS), reinsurance- and transportation- focused investment manager, is expected to take majority control of windstorm focused primary insurance group Weston Insurance Holdings Corporation, after a recent capital restructuring and increased investment in the carrier.