FedNat insurance holding firm files for Chapter 11 bankruptcy [South Florida Sun-Sentinel]

FedNat Holding Co., a Sunrise-based homeowners insurance company, has filed for Chapter 11 bankruptcy protection in Fort Lauderdale after succumbing to financial pressures generated by severe weather events, industrywide lawsuits and the placement of its property insurance unit into a receivership.

The company and several affiliates will continue to operate, the petition says, and will use Chapter 11 “to explore all value maximizing propositions for creditors including potential asset sales.”

FedNat said it already has begun negotiating with an unidentified third party “to submit an asset purchase agreement ... relating to a sale or sales in short order,” according to an affidavit filed by its chief restructuring officer, Katie Goodman of Atlanta.

Founded in 1992, the company said it has $6.5 million in cash on hand to fund its day-to-day business, pay employees and service policy holders.

The petition does not identify the assets to be sold.

FedNat is an underwriter and claims processor whose clients are insurance companies that write homeowners policies. Many of those firms, including its biggest customer and wholly owned subsidiary, FedNat Insurance Company, accumulated large losses over the years.

FedNat’s financial troubles started to snowball after Florida’s Department of Financial Services forced the subsidiary into receivership earlier this year. In May, the department, which acted as receiver, canceled 56,500 policies and arranged to transfer about 83,000 policies to another company, according to reports.

FedNat, however, remained on the hook for claims and other obligations. In September, it informed the state that it lacked the funds to cover so-called “runoff” obligations.

“Additionally, the debtors have been severely impacted by, among other things, an elevated number of severe weather events giving rise to catastrophe losses [particularly losses stemming from FNHC’s non-Florida books of business], rate issues, and litigation abuse,” Goodman wrote in an affidavit accompanying the bankruptcy court petition.

FedNat’s biggest creditor is Bank of New York Mellon, which holds two loans worth more than a combined $130 million, according to the petition. The state Department of Financial Services is the second largest creditor with a disputed claim of nearly $41 million. The nature of the claim is not identified.

The bankruptcy filing came one day before the Florida Senate opened a special session on Monday to address the state’s insurance crisis.

A report by the ratings agency AM Best describes “how large national insurance companies have dramatically limited coverage they are willing to write in Florida,” according to the News Service of Florida.

Five writers of homeowners’ insurance account for more than 50% of premiums written in other states, but only 5% in Florida.

“Public policy initiatives need to consider how to make Florida attractive to national insurers and reinsurers, to incentivize them to expand their appetite for Florida risks,” the report said. “Absent that, a lack of competition may continue to fuel affordability issues for primary insurers with respect to reinsurance and consumers in need of basic homeowners’ coverage.”

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