It's that time of year again in Florida. Peak hurricane season is bearing down on the state like that flying saucer in the movie Nope.
Insurance insiders say policy holders are covered — as long as the state isn't hit by more than two major storms.
Typically, mid-August through mid-October is when Florida and the southeastern United States face the biggest risk of destructive tropical cyclones. You know the infamous hurricane names: Irma, Michael, Katrina, Frances, Ivan, and Jeanne. All of them made landfall during that period.
Two other brutal storms occurred on the edge of the time frame: Hurricane Wilma (Oct. 15 to Oct. 25 in 2005), and Hurricane Charley, (Aug. 9 to Aug. 14 in 2004).
All of those major storms left billions of dollars in damages and a weakened insurance industry that has required two rounds of legislative reforms, infusions of private capital investment and commitments of public funding to guarantee claims payment if catastrophe strikes.
Florida’s insurance market has spent most of the last two years on life support, battered by a torrent of financial woes. Heavy losses caused widespread fears — just before the official start of hurricane season on June 1 — that a large number of companies would not be able to meet the state’s minimum financial-strength requirements to protect all of the state’s property owners.
Their failure just before hurricane season would have been devastating to homeowners who have seen annual premiums balloon to an average of $4,231, nearly triple the U.S. average of $1,544, according to the industry-funded Insurance Information Institute.
Five insurers have failed this year — the most in recent memory. Their failures left 292,200 policyholders forced to find coverage elsewhere. Another 68,200 were canceled as the state ordered FedNat Insurance Co. to tighten its belt. Many of the displaced homeowners were forced into state-run Citizens Property Insurance Corp., the so-called insurer of last resort. This week, Citizens reported topping 1 million policies for the first time since 2013.
Despite those challenges, all surviving Florida-based insurers have been able to purchase sufficient levels of reinsurance — that’s insurance that insurers must buy to ensure they can pay all claims after a catastrophe — to meet state requirements, says Paul Handerhan, president of the consumer-oriented watchdog group Federal Association for Insurance Reform.
With the reinsurance buys, Florida companies will be able to pay all claims after an initial storm with a probability of happening once in 130 years and a second 1-in-50-year storm, Handerhan said.
That’s the level of financial security that insurance companies need to maintain financial stability ratings of A (exceptional) by Ohio-based ratings agency Demotech, says Joe Petrelli, Demotech’s president and co-founder.
And despite a big scare that Demotech sent through the state in mid-July when it warned 27 insurers that their ratings were about to be downgraded below an A — potentially triggering a cascade of trouble for Florida’s housing market — all but a few Florida insurers were able to retain their A ratings by showing Demotech that they resolved their issues, including by securing their reinsurance buys and Improving their financial performances in the second quarter.
Petrelli said by email that insurers that were informed of impending ratings downgrades have since presented information from their second-quarter operating results. Those reports show improvements compared to their first-quarter results, he said. “Also, some carriers infused additional capital to sustain them as their revised business plan is implemented and becomes fully functional.”
Reinsurance good for just two named storms
John Rollins, former chief risk officer at Citizens and current director of ventures at Texas-based Evans Insurance Group, said many Florida insurers were able to improve their financial results in the second quarter because of rate increases, non-renewals of policies covering older homes, and swapping full-value roof replacement coverage for depreciated-value coverage.
Yet most insurers are covered for just two named storms, he said, have limited coverage for adjuster-related expenses, and were required to pay their reinsurance bills in full in July, leaving some low on cash.
“We have uneasy equilibrium until the wind blows,” he said. “If we have no storms, those that placed just enough reinsurance will survive and build some capital. If the wind blows, then cash crunches will resume as the first wave of claims is paid out.”
A 1-in-130-year hurricane has never been recorded. The closest was the Great Miami Hurricane of 1926, which caused the equivalent of $235 billion in damage in today’s dollars, devastated South Florida’s burgeoning economy, and killed 372 people.
Some companies could face financial trouble if more than two storms hit Florida this year, Handerhan said.
To tap into its reinsurance, a company must first spend 10% of its surplus on claims, similar to how property owners must pay a deductible before seeking reimbursement from their own insurance policies. But that 10% requirement is for each storm. If a second storm hits, the company must spend another 10% of its surplus before accessing its reinsurance coverage for that storm.
If two major storms hit, companies will have to buy more reinsurance in the middle of hurricane season to cover any additional storms. That cost, along with any additional 10% deductibles, could leave companies in dire straits before the end of an unusually active storm season, Handerhan said.
The amount of reinsurance coverage offered to Florida insurers this year was reduced compared to previous years because reinsurance providers see Florida as a bad risk, thanks to five years of net losses, increased frequency of small but costly events like hail and tornadoes in northern areas of the state, and high levels of claims litigation. What was made available was more costly than in recent years, causing some insurers to purchase bare-minimum amounts.
If companies are forced to buy more reinsurance in the middle of the hurricane season, “it’s going to be hard to get, and if you can get it, it’s going to be expensive,” Handerhan said.
Reinsurance is vital for the smaller insurers that dominate Florida’s property insurance market. Two insurers — Weston Property & Casualty and Southern Fidelity — went bankrupt over the past two months because they didn’t have enough money to purchase required amounts of reinsurance. They were the fourth and fifth insurers to fail this year, after Lighthouse Property Insurance Co., Avatar Property & Casualty and St. Johns Insurance Co. were ordered into dissolution during the spring.
Demotech gives A ratings after all
Maintaining an A rating from Demotech is important as well because federal mortgage loan guarantors Fannie Mae and Freddie Mac won’t accept anything lower from a Demotech-rated company. Homeowners with insurers rated below A could find themselves with force-placed coverage, an expensive alternative that’s often sold by companies not regulated by the state.
That’s why Insurance Commissioner David Altmaier and Florida Chief Financial Officer Jimmy Patronis took the unusual step of publicly admonishing Demotech in July after learning that Demotech had sent letters to at least 17 companies warning of impending downgrades below A.
Patronis called Demotech a “rogue ratings agency” that was “playing havoc with the financial lives of millions of Floridians.” He asked leaders of the Federal Housing Financial Agency, Fannie Mae and Freddie Mac to allow Florida to find a ratings agency to replace Demotech.
Petrelli told the South Florida Sun Sentinel that Demotech sent letters to 27, not 17, companies warning of impending downgrades.
Shortly after, Altmaier announced that the state had created a “temporary market stabilization agreement” that pledged Citizens’ $11.3 billion claims-paying ability to cover any claim left unpaid by an insurer failure. That promise, Altmaier said, should allay any concerns by the federally backed mortgage guarantors about ratings downgrades and subsequent bankruptcies.
But after Demotech affirmed A ratings by 28 Florida-based insurers since Aug. 1, just one company has applied for coverage under the temporary agreement — United Property & Casualty, downgraded from A to M (moderate) on Aug. 1.
United was the only company downgraded below A since Aug. 1. A handful of others had their ratings withdrawn, including Weston, just before the state ordered it into receivership. Ratings of two companies were withdrawn because they no longer wanted to be rated by Demotech. Troubled FedNat Insurance, which continues to restructure and downsize under state guidance, was downgraded in April from A to S (substantial). On Aug. 1, Demotech withdrew its rating altogether.
Spokespersons for the federal mortgage guarantors did not respond to questions from the Sun Sentinel on Friday asking whether they would waive their A rating requirements in response to the state’s backstop.
However, Mark Friedlander, communications director for the industry-funded Insurance Information Institute, said he learned from an “impeccable” inside source that the government-sponsored enterprises have not yet agreed to accept the state’s temporary reinsurance plan in lieu of a Demotech A rating.
A spokeswoman for the Florida Office of Insurance Regulation said “an acceptable reinsurance arrangement” is permitted by the mortgage guarantors in lieu of an acceptable financial stability rating.
“OIR is confident the temporary market stabilization arrangement qualifies companies for an exemption and we’ll continue to provide updates regarding the arrangement as they become available,” she said.
‘Held together by chewing gum’
Stacey Giulianti, chief legal officer of Florida Peninsula Insurance, said homeowners can be confident heading into the peak of hurricane season.
“Other than for a few, smaller companies that could not secure reinsurance coverage, the remainder of the marketplace is exceedingly strong and financially sound,” he said. Giulianti added that “this year is probably safer than any other year from an economic standpoint,” referring to the state’s market stabilization deal and the Florida Hurricane Catastrophe Fund’s $16 billion in reinsurance capacity.
While insurers’ reinsurance coverage could be enough to protect policyholders and the overall health of the market through no more than two storms, Rollins acknowledged, “Bottom line, it’s all held together by chewing gum now.”
Chip Merlin, founder and president of Merlin Law Group, which represents policyholders in lawsuits against insurers, said, “We better hope that a major hurricane does not strike Florida. If so, all bets are off regarding the ability of companies to keep their Demotech A ratings.”
Friedlander takes a dimmer view. Since a special legislative session in May limited attorneys fees and allocated an additional $2 billion in state-funded reinsurance to shaky companies, nine insurers either stopped writing new policies or announced plans to withdraw from Florida, he said in an email.
“All have pointed to the lack of decisive action by the state legislature to address the root causes of the financial crisis facing insurers: roof replacement schemes and excessive litigation,” he said.
Though Handerhan pointed to indications that reforms enacted by the legislature over the past two years have begun to improve companies’ financial performances, Friedlander countered, “There are no indications that property reform legislation passed over the past two years is having any positive impact on the market.”
“Our assessment is that the Florida residential insurance market continues to deteriorate and remains the most unstable in the U.S.,” he said.
