Florida headquartered primary insurer FedNat has lost its ‘A’ rating as Demotech has downgraded its Financial Stability Ratings (FSR) to ‘S’ (Substantial), putting the carrier at-risk of its policies not being allowed for mortgaged homes.
Only last October Demotech affirmed the ‘A’ (Exceptional) Financial Stability Rating (FSR) of FedNat Insurance Company, saying that FedNat’s new plan to refocus its attention on the Florida market, plus its access to capital and expected future operating results, were all seen as supportive of the rating decision.
But things have changed and continued loss experience from catastrophes and weather in some of the Gulf States FedNat had expanded into have dented its ability to sustain the all-important ‘A’ rating.
The issue for FedNat here is that having lost its ‘A’ rating from Demotech, its policies will no longer be deemed acceptable by Fannie Mae and Freddie Mac for mortgage insurance.
In fact, its policies likely won’t be accepted when new mortgage loans are being approved and loan holders with a FedNat policy may now need to find another insurance carrier that has an ‘A’ rating from Demotech.
President of Demotech Joe Petrelli told the Florida Sun Sentinel newspaper that FedNat should be able to request a reevaluation of its rating “upon securing the necessary level of capital.”
Which suggests this is a surplus related issue and as FedNat’s policyholder surplus had declined to below $100 million at the end of last year, suggests it has fallen further by this stage of the year on the back of continued loss development.
Louisiana hurricane losses and Texas storms are said to have been the driver of recent loss development for FedNat.
FedNat reported a net loss of $103.1 million for 2021, compared with a loss of $78.2 million in the previous year, blaming higher reinsurance costs and the lack of any income tax benefits last year.
But the downgrade from Demotech appears more to do with ongoing claims development from catastrophe and weather events, which may also suggest a deeper underlying issue at FedNat than just higher costs being faced.
We understand FedNat is confident in its ability to raise capital in advance of the reinsurance renewal this year, but with reinsurance rates set to rise again, part of any new capital raised will likely have to cover those additional costs, as well as bolster any surplus deficiency.
Should FedNat struggle though, or even fail, there are another somewhere between 175,000 and 200,000 homeowners in Florida that could see their policies moving to Citizens, or cancelled altogether, should FedNat become another insurance failure in the state.