Future of another Fla. homeowners insurer in jeopardy after ratings downgrade

A recent ratings downgrade could put serious pressure on yet another Florida-focused homeowners insurance underwriter.

Demotech confirmed that it downgraded the financial stability rating of FedNat Holding Co.'s main insurance entity to S, Substantial, from A, Exceptional, after conducting a year-end review that included nonpublic information. Demotech President Joe Petrelli said in an interview that although FedNat Insurance Co. has tens of millions of dollars in cash on hand, he believes the insurer does not have enough given its outlook for 2022.

"It's really a question of how much cash they have on hand," Petrelli said. "To weather the first and second quarters and the balance of the year, they just need more capital raises."

Murky future

FedNat's troubles started to come to a head in early November 2021, when the insurer disclosed it would be pulling out of all non-Florida markets and focusing exclusively on the homeowners market in the Sunshine State. CEO Michael Braun said in a release announcing the move that FedNat's geographic expansion strategy experienced major challenges from "unprecedented" catastrophes in Texas and Louisiana.

The company's full-year net loss widened in 2021 to $103.1 million, or $6.18 per share, from $78.2 million, or $5.64 per share, a year earlier. FedNat blamed catastrophe weather events and higher reinsurance costs, among other things, for the growing loss in 2021.

From Demotech's perspective, the change may cause issues related to FedNat's acceptance by the secondary mortgage marketplace, Petrelli said. There may also be issues surrounding the insurer's independent audit, which has yet to be completed.

Further, FedNat's failure to file its annual Form 10-K on time could be considered a default event according to the indentures governing some of its debt. If the trustee or holders of 25% of the principal amount of outstanding senior or convertible notes file a written notice of default, FedNat would have just 45 days to remedy the situation.

That may put FedNat's future in the hands of bondholders, such as Athene Holding Ltd. Regulatory filings indicate that Athene Annuity & Life Co. directly held $7 million of FedNat's $21 million in outstanding convertible notes as of year-end 2021.

Athene declined to comment for this story.

Recent Florida failures

The Florida residential property insurance market is losing substantial amounts of capacity to insolvencies and also faces the withdrawal, in whole or in part, of several leading homeowners insurers due to a litigation environment that has produced poor financial results. The market's troubles have led to a spate of homeowners companies failing, announcing plans to wind down or implementing significant new underwriting restrictions in recent months.

For instance, the Louisiana Department of Insurance on April 11 said it placed Tampa, Fla.-based Lighthouse Property Insurance Corp. into receivership. Florida regulators also placed St. Johns Insurance Co. Inc. and Avatar Property & Casualty Insurance Co. into liquidation on Feb. 25 and March 14, respectively.

Citizens Property Insurance Corp. has been feeling the pressure of being forced to take up policies as private sector insurers move out of Florida or fail. The state insurer of last resort saw its polices in force soar nearly 40% year over year in 2021. It had more than 792,600 polices in force as of the end of February and expects that number to rise to more than 1 million by the end of this year.

FedNat remains a significant writer of residential property coverage in Florida, though its presence has been significantly diluted over the last five years. In 2017, FedNat was the fifth-largest writer of residential property polices and recorded $439.9 million in direct premiums written in the Sunshine State. By 2021, the insurer had tumbled to 14th and logged just $373.7 million in direct premiums written that year.

Attempts to contact FedNat via email were unsuccessful. A call made to FedNat's Braun was not returned.