Florida Insurers’ Ability To Respond To Next Catastrophe ‘Uncertain’

June 01--The ability of Florida's young homeowner insurance companies to manage a large catastrophic hurricane is "uncertain" despite recent strong financial performance, a new Fitch Ratings analysis asserts.

The report released last week, "Florida Homeowners Insurance Market Update: No Time for Complacency Following Hurricane-Free Decade," says the short history and lack of experience with catastrophes would prevent many of Florida's newly created insurance companies from earning "A"-level financial strength ratings.

The report does not suggest that newer insurance companies -- which hold 60 percent of the market in the state -- are in financial trouble.

In fact, it says that a decade without a hurricane making landfall has enabled Florida's homeowner insurance market to replenish capital from 2004-05 losses and improve capacity to withstand future catastrophe events.

"It's not a question of if these Florida specialists will be tested by a hurricane but rather when the next catastrophe strikes, will they be prepared to handle a significant increase in claims volume?" Fitch Director Christopher Grimes said in the report.

Fitch, one of the nation's three largest credit rating agencies, does not rate the Florida homeowner insurance market. But if it did, analytics of 32 companies that derive most of their homeowner insurance premiums from Florida suggests those companies would be unlikely to receive "A" financial strength ratings, the report said.

"A" ratings are the highest investment grades bestowed by agencies such as Fitch, Standard & Poor's and Moody's. "Investment grade" ratings include AAA, AA, A and BBB, while BB, B, CCC and below identify companies that analysts believe are riskier investments.

The report said the companies are limited by relatively small size and scale, concentrated products and geographic profiles, relatively low levels of surplus and heavy reliance on reinsurance -- which is insurance bought by insurers.

"Many growing Florida property insurers have brief histories, untested by a large loss event, which creates uncertainty as to how these firms respond to the next inevitable hurricane," the report said.

Last October, the state Office of Insurance Regulation said 67 insurers that participated in its simulated "stress test" had more than the minimum capital and surplus required to respond to three simulated catastrophic storm events.

The companies owe their growth in large part to the number of policies shifted from state-run Citizens Property Insurance Corp. Citizens decreased in size from nearly 1.5 million policies in 2011 to 490,328 at the end of March, while building a nearly $7.4 billion surplus.

Citizens' improved financial strength enhances the Florida homeowner insurance market's "overall resiliency," but transferring the risk to the new companies "adds to the market's dependence on smaller (insurance companies) with more limited capital levels anted access to new capital than Citizens," the report says.

And while the cost of reinsurance has declined over the past few years, bolstering the companies' financial positions, heavy reliance on reinsurance could place insurance companies in an unfavorable negotiating position with reinsurers when settling claims and disputes in a period of large catastrophic losses, the report said.

Seven of the 32 companies that Fitch looked at had reinsurance ratios in 2015 that would result in risk ratings of "BBB+" or lower.

"Extensive catastrophe exposure and dependence on reinsurers are key limiting factors that reduce the likelihood of Florida specialists gaining "A" category ... ratings," the report said.

Jay Neal, president and CEO of the Florida Association for Insurance Reform, a consumer watchdog organization, said "it's all true" that Florida's young companies currently rely more on reinsurance and maintain smaller surpluses than investors would prefer to see, based on industry benchmarks.

"But that means nothing when it comes time to pay claims," he said. "Financial solvency is the least of our problems right now." More important, he said, is stemming increasing costs and lawsuits over non-weather-related claims, including water losses, that threaten to fuel rate increases for homeowner policies years to come.

Neal said he expects the companies to rely less on reinsurance as they build up their surpluses over the next 20 years.

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