The already embattled Florida residential property insurance market will absorb another blow as a homeowners writer's collapse will lead to the cancellation of approximately 37,000 policies by mid-April.
The liquidation of Avatar Property & Casualty Insurance Co. under a consent order issued March 14 by the Leon County, Fla., circuit court will likely trigger further expansion of Citizens Property Insurance Corp. just as the state-run insurer of last resort's policy count swelled as of Feb. 28 to its highest level at a month's end since September 2014.
Unlike in the pending liquidation of St. Johns Insurance Co. Inc., where the Florida Department of Financial Services struck an agreement for Slide Insurance Co. to provide for continuous coverage to policyholders until their policies would have otherwise expired or come up for renewal, the department served notice that Avatar's homeowners, dwelling fire and commercial multiperil policyholders would need to contact their agents to obtain replacement coverage ahead of the April 13 policy cancellation date.
The department characterized the Florida residential property insurance market as "challenging" when arguing in favor of the St. Johns arrangement with Slide, which provided at least a temporary home to upwards of 147,000 policies. While Avatar is only a fraction of that size, the implications of its demise may be no less significant as it may accelerate Citizens' undesired expansion.
Avatar ended 2021 with a policyholders' deficit of nearly $28 million, according to its annual statement, rendering it insolvent. The company explained in the filing that it recorded adverse prior-year reserve development of $41 million in the fourth quarter of 2021 at the recommendation of its appointed actuary as compared with a $16 million increase that had been suggested by a consulting actuary that the Avatar board had retained. Although Avatar said it would have had surplus of $1 million with the lesser estimate, the company still would have required the infusion of several millions of dollars to avoid having a risk-based capital ratio at the mandatory control level based on its authorized control-level risk-based capital of $7.5 million at year-end 2021.
In commentary contained in the notes to the annual statement, Avatar made a series of allegations regarding the market environment that culminated in the receivership. The company said it was ultimately unable to overcome those circumstances even after a successful 2020 implementation of a multifaceted profit-improvement plan.
"Despite all of these efforts, actuarial loss reserve development of claims and related legal expenses are greater than Avatar's current balance sheet can support," the filing said. It added that the lack of meaningful Florida state legislation to address "fraud issues" caused potential investors to be concerned about the market's future, and Avatar added no new capital during the fourth quarter of 2021.
"Florida property insurance carriers have been increasingly burned by roofing fraud and frivolous lawsuits," the filing said. "Lawmakers and industry insiders alike have said that the state's property insurance market is in a 'freefall.' Frequent and large rate increases are pricing consumers out of the market. Multiple carriers have moved out or suspended writing coverage in Florida."
The latter statement will make the placement of Avatar's outstanding policies with a company other than Citizens all the more difficult.
At year-end 2021, according to Florida quarterly supplemental report submissions, Avatar had 38,282 personal and commercial residential property insurance policies in force with associated annualized direct premiums written of $75.3 million. The Florida Department of Financial Services put the current policy count at about 37,000 in its March 14 notice to Avatar agents.
Approximately 73.1% of the policies at year-end 2021 involved owner-occupied homeowners business, with 13.2% in condominium owners' business. The company had 121 condo association commercial multiperil policies in force, with the associated annualized written premium accounting for 8.1% of its total. Note that these figures differ from those reported on the Florida state page of Avatar's annual statement as the supplement reflects annualized written premiums associated with policies in force in the fourth quarter of 2021. Avatar's flood policies do not face cancellation, but they involved direct premiums written of only $5,397 in 2021.
The south Florida counties of Palm Beach, Broward and Miami-Dade accounted for 27.7% of Avatar's personal and commercial residential property policies and 35.0% of its annualized personal and commercial residential property insurance premiums.
Citizens, meanwhile, reported 792,616 policies in force across business lines as of Feb. 28, up 2.0% from the end of January and 43.5% higher than on the same date in 2021. It maintains a particularly heavy concentration in the three south Florida counties as they combined to account for 50.8% of its total policies as of Feb. 28.
The company anticipates continued increases in policies throughout 2022, and it has budgeted for a year-end total of more than 1.06 million. It has experienced sequential increases in policies in force in 12 consecutive months and 25 of the last 26 months as well as year-over-year increases of 10% or more in 22 consecutive months.
The current expansionary cycle began in earnest in November 2019 when the collapse of Florida Specialty Insurance Co. triggered a month-over-month increase in policy count of 5.9%. Like the Avatar situation, there was no formal transition plan with a private carrier to take on the company's in-force policies ahead of their eventual cancellation, leaving Citizens as the expected destination for much of the business.
Ultimately, Citizens officials said they were pleasantly surprised to find robust interest in the Florida Specialty policies in the private market, and the company ended up absorbing far fewer of insurer's policies than management had anticipated. The company ended up taking on 20,200 policies in November 2019, and the number of associated policies declined to approximately 18,000 by the end of 2019.
But market conditions and sentiment seem markedly worse today, and Avatar's cancellations would occur seven weeks ahead of the start of the North Atlantic hurricane season instead of at the end of that period.
"Continued, uninterrupted property coverage is particularly important during hurricane season," the Florida Department of Financial Services said in its notice to Avatar policyholders.
Many of them may initially find only one viable option for placing their business given the gulf that often exists between the rates offered by Citizens, which is limited by statute in its ability to raise prices, and the private carriers that continue to seek new customers. A series of upcoming public meetings of the Citizens board of governors and key committees should offer more clarity as to how many policies the company is preparing to take on.
Citizens ranked as the No. 2 Florida homeowners insurer in 2021, behind only Universal Insurance Holdings Inc., after placing fourth as recently as 2019. Absent currently unforeseen developments through the balance of 2022, it is poised to retake the top spot for the first time in eight years.