Financial stability rating for Sunrise-based insurer FedNat downgraded [South Florida Sun-Sentinel]

Sunrise-based FedNat Insurance Company, one of five publicly traded property insurance companies based in Florida, lost its A (Exceptional) financial stability rating but does not appear to be in immediate danger of collapse.

Financial analysis firm Demotech, which assigns stability ratings to insurers regulated by the state, downgraded the company’s rating to S (Substantial) on Friday.

The S rating, because it indicates that FedNat is still financially sound, will not trigger the same alarm level that compelled the state to force several other insurers into receivership and dissolution over the past year. The most recent were St. Johns Insurance, which lost its rating in February, and Avatar, which lost its rating in March. Two other companies were dissolved last year after losing their stability ratings.

In an email, Demotech president Joe Petrelli attributed the downgrade to weather claims from Louisiana and Texas following the company’s expansion into those markets. Paying the claims consumed funds and time that Demotech expected FedNat to devote to its recently revised business model, “which is to retract from other states to concentrate on Florida-focused homeowner insurance,” Petrelli said.

FedNat has access to capital to implement its revised business model, he said, adding, “Upon securing the necessary level of capital, FedNat should be positioned to request a re-evaluation” of its financial stability rating, Petrelli said.

Demotech ratings downgrades typically signify that the agency has lost confidence that the insurer has ample reserves or reinsurance coverage to pay all claims after a 1-in-100-year event. A downgrade below A also raises the possibility that federal mortgage loan guarantors Fannie Mae and Freddie Mac won’t accept FedNat coverage when approving new home loans. Policies for existing mortgage loans could be out of compliance with the enterprises’ loan-servicing guidelines. Fannie and Freddie require borrowers to secure insurance from companies with A Demotech ratings.

The company insured 189,644 homes in Florida as of June 2021, according to data filed with state insurance regulators. FedNat stopped submitting publicly accessible policy counts for individual Florida counties in 2019, but archived data shows that it insured 56,465 homes in the tricounty region in 2019.

Data released by the National Association of Insurance Commissioners showed FedNat as the state’s 10th largest private-sector insurer in 2020, taking in $377 million in homeowner policy premiums.

Like most other Florida-based insurers, FedNat has been hemorrhaging capital in recent years, thanks to elevated weather claims, roof damage claims and increased litigation. In March, it reported a $103.1 million net loss for 2021, up from $78.2 million in 2020.

State records show the number of lawsuits filed against the company increased from 1,772 in 2020 to 2,032 in 2021.

FedNat did not immediately respond to emails and text messages seeking comment about the downgrade.

FedNat’s stock price was unaffected on Friday, because the stock market was closed for the Good Friday observance. Over the past five years, the company’s stock has lost 93% of its value as investor confidence in Florida’s insurance industry has decreased. On Thursday, FedNat’s stock price was $1.11 compared to a five-year high of $26.30 in August 2018.

Paul Handerhan, president of the consumer-focused insurance watchdog group Federal Association for Insurance Reform, based in Fort Lauderdale, said the FedNet downgrade provides more evidence that the state Legislature needs to call a special session to address the industry’s shaky financial condition.

“It is another warning sign that the market is continuing to devolve, which is going to result in Florida consumers having less insurance choices in tandem with having to pay dramatically higher insurance premiums,” Handerhan said.

Sen. Jeff Brandes, a Pinellas County Republican, is polling legislators in an effort to force a special session before hurricane season starts on June 1. Gov. Ron DeSantis said this week that he supports a special session on insurance, but only if legislative leaders can hammer out an agreement on reforms before a session is convened.

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at rhurtibise@sunsentinel.com.

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