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Select Demotech-rated Fla. insurers combine for $200M+ reserve build

Dozens of Florida-focused property insurers with financial strength ratings assigned by Demotech Inc. showed unfavorable prior-year reserve development in their 2018 annual statements.

Following an internal review of the annual statements for the 52 Florida-focused carriers it rates, Demotech foreshadowed that outcome in a Feb. 27 article outlining the need for insurers to shore up loss and loss adjustment expense reserves in a challenging judicial environment highlighted by litigated nonweather-related water-loss claims with an assignment of benefits.

With the recent public release of those annual statements, S&P Global Market Intelligence independently identified 51 individual property and casualty companies with active Demotech financial strength ratings and direct premiums written in 2017 from Florida allied lines, homeowners, farmowners and nonliability commercial multiperil business constituting more than 15% of the company's total across business lines and geographic markets.

Among those companies, prior-year development of incurred losses and defense and cost containment expenses was unfavorable by $207.7 million in the aggregate, with 37 companies posting adverse development, 13 showing favorable development and two reporting no development. The same 51 entities recorded unfavorable prior-year development in the aggregate amounts of $55.6 million and $90.1 million in calendar years 2016 and 2017, respectively.

Nine subsidiaries of five Florida-focused publicly traded holding companies combined to account for 72.7% of the overall adverse development. Units of privately held entities were responsible for the balance.

Demotech said it has "consistently prodded" a number of companies to push their reserving decisions to the upper end of what their actuaries have said could be possible.

"In mid-year 2018, Demotech advised many carriers to get the adverse reserve development behind them," the rating agency said. "To do so requires that the year-end 2018 statement present significant reserve development in the pursuit of reserve adequacy and future neutral or favorable reserve development."

The commentary represents the latest in a series of midwinter pronouncements that have had material impacts on the statutory statements of certain Florida-focused rated carriers. It remains to be seen whether the 2018 reserving actions achieve the desired effects, but their breadth was notable at a time in which the income statement for the P&C industry as a whole has apparently benefited from favorable development.

The Universal Property & Casualty Insurance Co. subsidiary of Universal Insurance Holdings Inc. posted the largest absolute amount of adverse development among the 51 companies reviewed by S&P Global Market Intelligence, at just under $100 million. Approximately $38.4 million and $30.8 million of that development pertained to accident years 2016 and 2017, respectively. As previously reported, the company attributed the adverse development to a "massive solicitation of claims" from plaintiffs' attorneys following Hurricane Irma.

The primary Florida subsidiaries of United Insurance Holdings Corp., Heritage Insurance Holdings Inc. and HCI Group Inc. reported adverse development in the amounts of $19.6 million, $12.7 million and $12.4 million, respectively. Service Insurance Co. (FL)'s $8.3 million and Safepoint Insurance Co.'s $7.6 million in unfavorable development stand as the highest amounts among the privately held entities in the 51-company cohort.

Safepoint partially offset its $10.6 million net loss, which included an underwriting loss of $13.9 million, with $7 million in paid-in surplus from its parent. Of that amount, $1.5 million was contributed in February but was recorded in Safepoint's year-end 2018 financial statements under Statutory Statement of Accounting Principles No. 72.

The insurer also entered a $6 million adverse development cover with an affiliated organization, which covers all losses occurring prior to the start of 2019. Other similarly situated entities reporting contributions of paid-in surplus subsequent to year end 2018 included Anchor Property & Casualty Insurance Co., Family Security Insurance Co. Inc., Gulfstream Property & Casualty Insurance Co., Prepared Insurance Co. and Southern Fidelity Property & Casualty Inc.

Demotech said reserve-boosting carriers "were required to infuse capital" so as to maintain surplus at a level that sustained their assigned ratings. However, the aforementioned companies' respective annual statements generally did not provide additional information about the circumstances that led to their receipts of paid-in surpluses.

Adverse development among Florida-focused carriers was not limited to private entities rated by Demotech. The state-run Citizens Property Insurance Corp.'s 2018 results included its highest absolute amount of unfavorable development in 12 years.