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Fla. property insurer keeps Demotech rating despite 'going concern' warning

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Fla. property insurer keeps Demotech rating despite 'going concern' warning

Florida Specialty Insurance Co. expects to enter a reinsurance partnership intended to protect existing policyholders following significant surplus erosion in 2017.

"Historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern given the current market environment in the state of Florida," the Sarasota, Fla.-based residential property insurer said in the notes to its annual statement. It provided assurances that final negotiations with "several potential partners to ensure its financial stability remains intact" were ongoing to alleviate that doubt, with a target for a formal announcement of an agreement by March 31.

The company's independent actuary, George Levine of KPMG LLP, elaborated on the nature of the prospective reinsurance agreement in his statement of actuarial opinion. He said Florida Specialty would cede 100% of its direct and assumed business starting March 1 through the combination of quota-share and loss portfolio transfer agreements.

Florida Specialty's surplus fell to $15 million from $20.3 million during 2017, thanks largely to a net loss of $5.7 million. Its authorized control level risk-based capital ratio tumbled to 283.5% as of Dec. 31, 2017, from 476.7% a year earlier.

While the company said its year-end surplus "exceeds the state required levels" of $10 million, Levine said Florida Specialty was at the company action level under Florida Office of Insurance Regulation provisions. The combination of an authorized control level RBC ratio of below 300% and a combined ratio of more than 120% triggers regulatory attention at the company action level, under NAIC guidelines, based on the application of a "trend test." Florida Specialty's 2017 combined ratio approached 145.2%.

Florida Specialty helped facilitate the protection of a third party's policyholders beginning in June 2016 when it entered a 100% quota-share agreement regarding the business of Mount Beacon Insurance Co. and acquired renewal rights to that company's book. Mount Beacon later entered an accelerated runoff under an agreement with the Florida Office of Insurance Regulation.

Rating agency Demotech said March 28 in a report on year-end 2017 financial results for Florida property insurers that it would continue its A financial strength rating for Florida Specialty as final deliberations with third parties continue.

That report focused on the impact of recent court decisions on what some in the industry have labeled an assignment-of-benefits crisis in the Sunshine State. The state-run Citizens Property Insurance Corp. has frequently alleged that the third-party abuse of the assignment of benefits has triggered a surge in litigated, nonweather-related water loss claims in certain parts of Florida, particularly Miami-Dade and Broward counties.

The rating agency's concerns are not limited to the assignment-of-benefits situation. It noted that the American Tort Reform Association had ranked Florida as the United States' No. 1 "Judicial Hellhole" for 2017-2018 due to what the group alleged to be the Florida Supreme Court's "liability-expanding decisions and barely contained contempt for the lawmaking authority of the legislators and the governor."

In response to the difficult environment, carriers "have revised claims procedures, practices, and protocols from the industry standards that previously existed to a Florida-only standard," Demotech said. It re-emphasized that "carriers must adapt to the changing judicial landscape by embracing proven technology and analytics-driven processes" in their internal claims-handling functions.

In affirming the financial strength ratings for various Florida property insurers that it covers, Demotech divided the companies into categories based on progress made in addressing challenges specific to the state's judiciary: 39 carriers that met applicable financial metrics and have adapted to changes created by Florida's judicial environment; 10 that have met applicable financial metrics and are enhancing their capability to adapt; and six that have adapted their business models to meet applicable financial metrics and are enhancing their capability to adapt to the judicial environment.

Among the individual entities included in the largest bucket were the primary Florida property insurance subsidiaries of publicly traded insurers such as Allstate Corp., Progressive Corp., Federated National Holding Co., Heritage Insurance Holdings Inc., HCI Group Inc., United Insurance Holdings Corp. and Universal Insurance Holdings Inc. The six companies said to have adapted their business models were Anchor Property & Casualty Insurance Co., Avatar Property & Casualty Insurance Co., Conifer Insurance Co., Cypress Property & Casualty Insurance Co., Prepared Insurance Co., and White Pine Insurance Co. Conifer and White Pine are units of Conifer Holdings Inc.

Florida Specialty's situation has arisen despite what Levine observed in his statement of actuarial opinion to be deliberate actions by the company to avoid exposure to the assignment-of-benefits issue through its focus on manufactured housing and a geographic presence in those parts of the state where claims of the sort are not prevalent.