Financial analysis firm Demotech has warned that it is anticipating downgrades for several insurance carriers in Florida, due to a number of state-specific pressures on financial performance.
Analysts noted that some carriers will likely seek a sale to avoid being downgraded, while others may ask for permission to voluntarily run-off outstanding claims.
Demotech expects to affirm its financial strength ratings for carriers that have managed to generate realisable operating income, as well as for those with access to sufficient cash to withstand Florida’s recent financial traumas.
This should result in rating affirmations for the majority of the 46 Florida insurers reviewed and rated by Demotech.
However, carriers that borrowed money in a holding company to infuse may need to restructure debt or negotiate a lower interest rate to enable them to have the capacity to reinvigorate their business model.
Their ability to demonstrate that they have the financial capacity to implement their business models will be dependent on the level of debt and interest rates, as well as market conditions and challenges for competitors, Demotech warned.
Florida insurers are currently facing a unique set of challenges, and the economics of the marketplace over the past several years have made it difficult for carriers to sustain a financial strength rating of A, Exceptional, in the near term.
Major market forces include investor capital exiting Florida, burdensome levels of holding company debt, large catastrophe losses from 2016 through 2019, and laws such as assignment of benefits, which have only recently been addressed via legislation.
Additionally, the change in the cost of catastrophe reinsurance in 2019 was, and will likely continue to be, a financial shocks to regional carriers, Demotech noted.
Although carriers can ‘true up’ reinsurance costs by making filings with the State of Florida Office of Insurance Regulation, the impact of higher reinsurance costs is immediate while the financial impact of the premium increase from ‘true up’ takes time to be realised, it explained.
Further issues include the cumulative impact of rate revisions over the past several years, and the pricing structure of Citizens Property Insurance Corporation, which Demotech believes is too competitive for a market of last resort.