Florida headquartered primary insurer FedNat has cast doubt over its ability to continue as a going concern in light of its recent rating downgrade by Demotech, while the firm expects further underwriting losses in Q1 2022 on the back of new catastrophe weather events.
Almost a decade ago, FedNat embarked on its expansion outside of Florida, but losses outside of the state, notably in Louisiana and Texas, made this extremely challenging, leading the carrier to announce plans to revert to writing business only in Florida again towards the end of last year.
At this time, FedNat said that rate momentum in Florida homeowners property insurance had made the market attractive again, while legislation designed to stem assignment of benefits (AOB) and reform other issues in the Florida market was also seen as a positive by the firm.
However, in recent times, hurricanes in Florida and along the Gulf Coast, coupled with severe weather events, have hindered the underwriting performance of FedNat, leading to losses for the last two years.
Reinsurance expense is also higher for the firm in light of the hardening marketplace and the fact many reinsurers are cutting their exposure in the state. And, with catastrophe losses remaining elevated, and reinsurance costs still higher, the outlook appears difficult for FedNat.
In response, Demotech recently downgraded the company’s Financial Stability Ratings (FSR) to ‘S’ (Substantial), putting the carrier at-risk of its policies not being allowed for mortgaged homes.
FedNat replied by agreeing to file with the Florida Office of Insurance Regulation (OIR) by April 29, 2022, a plan to demonstrate its ability to secure and maintain a financial strength rating acceptable to the secondary mortgage market, acquire sufficient reinsurance as of its July 1, 2022 renewal, support its existing business via the securing of additional capital, and address its non-Florida losses and policies.
Now, however, in a form 10-K, FedNat has concluded “that there is substantial doubt regarding its ability to continue as a going concern under Generally Accepted Accounting Principles.”
Explaining that it has reached this conclusion “based on its expectation of continued underwriting losses in the first quarter of 2022, primarily as a result of new catastrophe weather events occurring late in the first quarter and, more importantly, based on Demotech’s downgrade of FNIC’s rating from “A” to “S”.”
FedNat expects the downgrade to adversely impact its ability to procure excess-of-loss reinsurance at the mid-year renewals. If this happens, the company will not be in compliance with the requirements of the OIR regarding reinsurance coverage, which would ultimately place FedNat in receivership.
“Further, the Company’s conclusion that there is substantial doubt with respect to its ability to continue as a going concern is expected to result in increased regulatory oversight of the Company’s operations by the OIR,” says FedNat.
Adding: “Being placed into receivership and/or failing to obtain excess-of-loss reinsurance each represent potential defaults under the applicable covenants of our senior note indentures that could result in acceleration of repayment of our debt. We cannot provide any assurance that we will be able to comply with certain covenants in our senior note indentures or to make satisfactory alternative arrangements in the event we cannot do so.”