Fallout from Demotech's cautionary statements regarding potential downgrades to financial stability ratings for some Florida-focused property insurers continues to emerge.
The agency downgraded its rating for one company and sustained its ratings for three others after several M&A deals were announced.
Demotech now rates Anchor Property & Casualty Insurance Co. at M, Moderate, down from A, Exceptional, after the company made "significant alterations" to its business model. HCI Group Inc. on Jan. 13 announced a preliminary agreement to acquire the company's policies through its Homeowners Choice Property & Casualty Insurance Co. Inc. subsidiary. One day later, the Florida Office of Insurance Regulation confirmed its receipt of a letter of intent regarding that transaction. The regulator further disclosed that Anchor Property & Casualty had discontinued writing new Florida business, effective Jan. 14.
Demotech sustained the A, Exceptional rating for Anchor Property & Casualty sister company Anchor Specialty Insurance Co. Florida-based and Texas-domiciled Anchor Specialty is subject to a pending agreement to be sold to Weston Insurance Holdings Corp. The rating agency took the same action as it pertains to the A, Exceptional ratings held by Sarasota, Fla.-based Centauri National Insurance Co. and Centauri Specialty Insurance Co., which Demotech said are subject to pending agreements to be sold to the parent of Avatar Property & Casualty Insurance Co.
HCI's announcement did not contain additional information about the circumstances that led to the preliminary agreement nor did it provide specific logistics regarding the proposed transaction. The Florida Office of Insurance Regulation said that the contents of the letter of intent has been marked as a trade secret and, as a result, were deemed confidential by statute.
As Demotech described it, however, the transaction involves the sale of the unexpired period of Anchor Property & Casualty's current policies in force. The rating agency also said that Anchor Property & Casualty plans to coordinate with its regulator to effect the orderly runoff of its remaining liabilities. The Florida Office of Insurance Regulation confirmed that it is working with HCI and Anchor Property & Casualty on a runoff plan so as to "ensure consumers have seamless access to coverage." It anticipates the agreement will be finalized by mid-February.
Demotech said that it will continue to review, analyze and comment on Anchor Property & Casualty's balance sheet integrity and operating results during the expected voluntary runoff, given what it described as the company's "commitment to a 'soft landing' for existing policyholders and claimants." The rating agency's analytical process had been designed to evaluate carriers executing a business model that is forward focused.
Regarding the other, more traditional transactions in which legal entities would be sold, Demotech used similar language in separate releases to indicate that it received assurances that the deals would have the effect of enhancing the targets' year-end 2019 annual statutory statements. Also, in language used consistently across the releases, Demotech said it appears the targets' consumer, claimant, agency and reinsurer relationships "should be enhanced by the introduction" of the acquirers' "ownership, management, expertise, philosophy and financial resources.”
Weston Insurance Co. has participated in all four rounds of the Texas Windstorm Insurance Association assumption reinsurance depopulation program, and it is one of five companies listed as participating in TWIA's voluntary market depopulation program. The company generated $15.4 million of its $64.8 million in direct premiums written through the first three quarters of 2019 from the state of Texas. Nearly all of the rest came from Florida.
Texas accounted for $22.9 million of Anchor Specialty's $26.3 million in direct premiums written in the first three quarters of 2019. Louisiana accounted for most of the balance of the company's business volume. Anchor Specialty said in its 2018 annual statement that it was committed to growing in both states in 2019, including through the expansion of its "preferred" product in the Lone Star State through new agent relationships and territories.
On a pro forma basis, the acquisition would result in Weston having generated 54.2% of its direct premiums written for the first three quarters of 2019 from the state of Florida, as compared to nearly 76.2% on a standalone basis as originally reported.
Another Weston Insurance Holdings subsidiary, Weston Select Insurance Co., has filed to begin writing business in South Carolina.
Both Anchor Property & Casualty and Anchor Specialty are subsidiaries of the privately held Anchor Insurance Holdings Inc.
The two Centauri companies have a somewhat similar geographic setup, where Centauri Specialty is a Florida domestic while Centauri National is domiciled in Louisiana. Centauri Specialty generated $40.7 million of its $119.5 million in direct premiums written from Florida during the first nine months of 2019; all $28 million of Centauri National's business during that period came from Louisiana. Centauri National is a direct subsidiary of Centauri Specialty.
The Florida Office of Insurance Regulation told S&P Global Market Intelligence that the parties had provided notice of the proposed transaction, but it has not yet received an acquisition filing. The deal would require the regulator's approval.