Florida’s property insurance crisis is about to hit home for tens of thousands of policyholders.
More than 68,000 policies of troubled Sunrise-based FedNat Insurance Company and its sister companies Maison and Monarch National will be canceled by the end of June, according to terms of a consent order filed Friday by the state Office of Insurance Regulation.
The order follows the downgrade of FedNat’s financial stability rating by ratings firm Demotech a month ago. The cancellations, meant to help FedNat’s parent company, FedNat Holding Company, survive after reporting $103.1 million in reported losses in 2021, will force the displaced policyholders to scramble to secure coverage just as hurricane season begins.
They’ll have to shop for insurance in an unprofitable market that has forced privately owned companies to cancel or non-renew high-risk policies and raise rates for remaining customers. Numerous companies have stopped writing new policies in the state, sending hundreds of thousands to state-owned Citizens Property Insurance Corp., the so-called insurer of last resort.
“I don’t know what companies will be willing to take on these policies,” said Sen. Jeff Brandes, a Tampa Bay-area Republican and leading voice for legislative reforms to stem losses that insurers blame on fraud, inflated claims, and excessive lawsuits. “Most Florida-based companies are looking to shrink, not grow. I would imagine a majority will go into Citizens.”
The cancellations are part of a rehabilitation plan that state insurance regulators required FedNat to submit following the rating downgrade from A - “Exceptional” to S - “Substantial.” Federally funded mortgage loan guarantors Fannie Mae and Freddie Mac require borrowers to maintain coverage with A-rated insurers. At the time of the downgrade, Demotech CEO Joseph Petrelli said FedNat could potentially restore its A rating with an infusion of capital that would enable it to enter the hurricane season with sufficient claims-paying capacity.
Under the plan, FedNat Insurance Co. will cancel 56,500 personal residential policies while Monarch will cancel 8,400 policies and Maison will shed 3,300 policies. The 68,200 policyholders will be given 45 days notice of the cancellations.
FedNat Insurance Co. will transfer the remaining 83,000 of its policies to Monarch, which has entered into an agreement with a new investor to provide capital “through an acquisition,” the consent order states. FedNat Insurance Co., meanwhile, will wind down operations and stop writing new business.
Affected policyholders will include owners of single-family homes, condo owners and renters.
The consent order, signed by Insurance Commissioner David Altmaier, called the early cancellation of policies “an extraordinary statutory remedy reserved to address insurers which [without the cancellations] are or may be in hazardous financial condition.”
Paul Handerhan, president of the Federal Association for Insurance Reform, a consumer-oriented watchdog group, said that while it’s unfortunate that 68,200 policyholders will be canceled and likely end up in Citizens, FedNat’s rehabilitation plan is “the best alternative of a bad situation, resulting in 80,000 policyholders being able to maintain their insurance coverage.”
The consent order stated that without the cancellations, the three companies would not be able to secure adequate reinsurance coverage for the 2022-23 hurricane season and maintain a level of surplus sufficient to meet state financial stability requirements.
Brandes said the developments are yet another symptom of an insurance market on life support. “This is not a small company,” he said. “This is one of the largest insurance companies in Florida, and one of just a few publicly traded companies.”
Reinsurance is coverage that insurers buy to ensure they can pay claims after catastrophic weather events.
In a note to investors coinciding with FedNat’s announcement on May 9 of a $31.3 million net loss in the first quarter of the year, the company’s principals said it would continue its effort to exit states outside Florida and reduce its Florida policy count.
Under the rehabilitation plan it submitted, the company would become “much smaller, with significantly fewer policies in force, and potentially result in additional capital coming into the holding company or into our insurance carriers,” the statement said. The policy reduction is “expected to enable the company to obtain excess-of-loss reinsurance on a smaller, Florida-only book of business.”
FedNat blamed $29 million of its first quarter losses on 11 “notable” weather events, including a wildfire, that impacted Florida, Texas, Louisiana and South Carolina during the first months of the year.
Losses in 2021 were driven as well by severe weather, such as the prolonged winter freeze in Texas that caused widespread instances of burst water pipes. Hurricane Ida also caused heavy damage in Louisiana in August.
Last year’s $103.1 million net loss followed a $78.2 million net loss in 2020 that the company attributed to five hurricanes hitting policyholders in southern states.
The company is one of five publicly traded insurers based in Florida. FedNat insured 189,644 Florida policyholders in June 2021 but since then has reduced that number to 140,000 as of May 12, the consent order states. In a May 10 earnings call, FedNat CEO Michael Braun said the company has dropped about 100,000 policies during the previous year.
Costs of policies for the company’s customers, meanwhile, have doubled over the past five years, Braun said.
In 2019, the last year that the company released county-by-county policy counts before declaring that information “trade secret,” records show it insured 56,465 homes in Broward, Palm Beach and Miami-Dade counties.
It’s unclear from the consent order how the cancellations will be distributed among policyholders across the state or whether private market companies have the capacity to absorb them. Many, if not most, could face little option but to go into state-run Citizens.
Citizens has been adding about 6,000 policies a week since March and is now approaching 1 million policies — up from 420,000 in 2019. Lawmakers warn that letting Citizens get too big puts nearly all insurance customers in Florida at risk of special financial assessments if Citizens can’t pay claims after a catastrophic storm season.
The cancellations come at a critical time for Florida’s insurance market. Four private-market companies have gone out of business over the past year, and several are rumored to be struggling to afford their required reinsurance buys in time for hurricane season.
On May 23, the state Legislature will convene for a five-day special session to address skyrocketing costs and plummeting availability of home insurance in the state.
Potential solutions include reducing availability of fees that plaintiffs attorneys are able to reap in claims settlements. Insurers say that loopholes in Florida insurance laws give attorneys incentives to work with repair contractors to inflate invoices and file multiple lawsuits against insurers, which result in destabilizing financial losses.
Brandes said Gov. Ron DeSantis and the leaders of the state House and Senate are crafting legislation for the special session, and he expects bills to be filed by Wednesday. He said the crisis will continue if the bills don’t address claims abuses, excessive litigation and attorneys fees. “If you don’t get this ship turned around, it’s going to rub against the iceberg until it sinks,” he said.