Unfavorable prior-year reserve development led Citizens Property Insurance Corp. to its largest net underwriting loss for a second quarter in 14 years.
A review of statutory data finds that the Florida state-run property insurer was not unique among its private market peers in posting an unfavorable comparison for the period, which typically serves as a relatively benign precursor to hurricane season.
Based on an analysis of disclosures made in its March 31 and June 30 statutory filings, Citizens produced a net underwriting loss of $27.1 million in the second quarter, compared with a loss of $1.4 million in the year-earlier period. Prior to that, it had been since 2005 that Citizens had generated a second quarter net underwriting loss of any amount. Its loss and loss adjustment expense, or LAE, ratio increased to 84.2% from 70.3%.
S&P Global Market Intelligence calculates that Citizens had $37.5 million of unfavorable development of loss and LAE reserves for prior accident years during the second quarter, based on disclosures on Part 3 of its quarterly statutory filings. Approximately $33.1 million of the unfavorable development pertained to accident year 2017. Citizens saw adverse development in the second quarter of 2018 as well, which the company attributed to the settlement of sinkhole losses from prior accident years in its commercial lines account.
The June 30 filing contained boilerplate language regarding the timing of claims settlements in a brief discussion of the unfavorable development, but Citizens separately reported a continued inflow of claims in 2019 related to 2017's Hurricane Irma. Materials posted in advance of a forthcoming meeting of the claims committee showed that Citizens received 2,690 first-notice-of-loss claims for Irma this year, through Aug. 5, of which 62.1% had representation from attorneys and/or public adjusters. Citizens in the past said claims with representation at first notice of loss have historically tended to result in litigation.
An aggregation of statutory data for 55 other individual Florida-focused property insurers finds that unfavorable development and underwriting losses were commonplace during the second quarter. Overall, the companies produced a net underwriting loss of $102.3 million, compared with a net underwriting gain of $7.6 million for the year-earlier period. Prior-year reserve development was unfavorable by $56.7 million. While the aggregate LAE ratio for the 55 companies dipped to 10.8% from 12.1%, the aggregate net loss ratio widened to 60% from 48.1%.
The 55 companies were selected as they generated more than half of their direct premiums written for the first half of the year from the state of Florida and have more than 80% of their total-filed direct premiums written during that 6-month stretch in the homeowners, farmowners, commercial multiperil, fire and allied lines on a combined basis. Quarterly statutory filings do not include a breakdown of premium writings at the line-of-business level by state. As such, second quarter results may not in every case emanate specifically from Florida property exposures.
Heritage Insurance Holdings Inc., for example, attributed higher losses and LAE in its quarterly SEC filing to higher catastrophe and noncatastrophe weather losses mostly from Florida and North Carolina. FedNat Holding Co. executives reported during an August conference call that the company had gross losses and LAE of $17 million resulting from second quarter catastrophes, with all but $1.5 million of that amount related to non-Florida business.
Heritage Property & Casualty Co. had a net underwriting loss of $29.4 million for the second quarter, which was the largest among the Florida-focused property insurers. FedNat Insurance Co. had a $7.8 million underwriting loss. Other notable underwriting losses included State Farm Florida Insurance Co.'s $10.4 million and Homeowners Choice Property & Casualty Insurance Co. Inc.'s $7 million.
Homeowners Choice had unfavorable development of $3.7 million in the second quarter, and HCI Group Inc. executives said during an August conference call that the action largely reflected a slight upward adjustment to its ultimate loss expectation for accident year 2018.
While Heritage showed favorable reserve development in the second quarter, company executives cautioned during an August call that they believe challenges specific to south Florida's tri-county region of Palm Beach, Broward and Miami/Dade has continued to "plague" the market. Heritage has moved to reduce its exposure to that part of the state as CFO Kirk Lusk on the call said "the environment for claims abuses is getting worse."
Florida's assignment of benefits reform legislation, which is intended to curb a portion of those alleged abuses, took effect July 1. According to a transcript of his remarks, Chairman and CEO Bruce Lucas said Heritage saw a "pretty big drop off in the amount of AOB activity on front-end claims in the month of July," but he believes the fraud will continue, though perhaps in a different format.
"I just don't see it really ever going away," he said.
Hurricanes also remain an omnipresent threat to Florida property insurers' results. National Hurricane Center forecasts as of Aug. 28 put Tropical Storm Dorian on a path to potentially impact the state's Atlantic coast.
