Reinsurance News

FedNat seeks to downsize ahead of reinsurance squeeze

10th May 2022 - Author: Matt Sheehan

Michael H. Braun, CEO of Florida based primary insurer FedNat, has revealed that the company is seeking to become “much smaller, with significantly fewer policies in force,” ahead of what it anticipates to be an extremely challenging mid-year renewal period.

fednat-logoLast month, leaders at FedNat cast doubts over the company’s ability to continue, after having its financial stability ratings (FSR) downgraded from an ‘A’ to ‘S’ by rating agency Demotech.

Alongside the release of FedNat’s Q1 results, Braun explained that he believes the FSR downgrade “will adversely impact our ability to obtain excess-of-loss reinsurance for coverage beginning July 1, 2022 and would place the Company in non-compliance with the regulations of the Florida Office of Insurance Regulation (OIR).”

The main 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.

FedNat’s net loss widened to $31.3 million in the first quarter of 2022, compared with a loss of $19.4 million for the same period last year, including an adjusted operating loss of $28.9 million, versus $19.4 million previously.

Stratumn, by SIA Partners

The company reported $31 million of catastrophe claims, net of reinsurance recoveries and other offsets including affiliated fees, including $29 million driven by eleven notable events that impacted Florida, Texas, Louisiana and South Carolina during the first quarter of 2022 of which approximately $10 million relates to non-Florida states.

In light of the ratings downgrade and the continuation of elevated catastrophe losses, FedNat has submitted a proposed action plan to the OIR which, if approved by them and regulators in other impacted states, would see it significantly downsize its operations, Braun stated.

This would potentially result in additional capital coming into the holding company or into its insurance carriers and would enable FedNat to obtain excess-of-loss reinsurance on a smaller, Florida-only book of business.

“Our action plan is currently being reviewed by the OIR and we will provide an update on the outcome of their review when available,” Braun said.

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.

This move is reflected in the $137.9 million of gross written premiums reported by FedNat in Q1, which is down on $174.2 million from Q1 last year due to non-renewals and run-off activities for Non-Florida states.

“We continued to make progress during the first quarter in our Florida homeowners business resulting from our strategic actions over the past five years to right size our Florida book and increase rates to more accurately reflect the higher costs of doing business,” Braun continued, commenting on FedNat’s Q1 performance.

“The Company also continued to make progress in the first quarter on our strategy to exit non-Florida markets and refocus on our historical market in Florida, a transition we believe would result in a financially stronger company, with less volatility, that would be rightsized to our current capital and surplus position.”

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