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Demotech-rated Fla. property insurers added millions in paid-in surplus


Date: March 07, 2017
Source: S&P Global


Several Florida property insurers obtained capital contributions in recent months to supplement policyholders' surplus that otherwise would have been eroded in part due to underwriting-driven net losses. S&P Global Market Intelligence found that at least 11 Florida-focused entities with A-category financial stability ratings from Demotech that are engaged in the personal and/or commercial residential property insurance business received capital contributions from their parents or affiliates between Dec. 1, 2016, and Feb. 28, 2017.

Each of the 11 entities reported net underwriting losses in 2016, a year in which many Florida personal and/or commercial residential property insurers saw a sharp reduction in underwriting profitability. Demotech disclosed in February that it asked certain of the 57 Florida property insurers it rates to infuse additional capital following a series of judicial rulings that cast doubt upon some of the industry's established claims procedures.

The rating agency suspended its previously written guidance applicable to the Florida companies as it reviews carriers' response to challenges raised by what the industry has characterized as a "crisis" associated with litigation stemming from the assignment of benefits on non-weather-related water loss claims. In particular, Demotech warned that some carriers faced potential downgrades in the absence of "necessary enhancements" to their balance sheets.

And it suggested that some could benefit from the application of Statutory Statement of Accounting Principles, or SSAP, No. 72, which provides insurers with the opportunity to address financial matters subsequent to year-end and prior to the March 1 due date for annual statutory statements. All 11 of the companies that were determined to have received capital contributions since Dec. 1, 2016, maintain ratings of "exceptional" or "unsurpassed" from Demotech, and several of them specifically referenced SSAP No. 72 in their discussions of the accounting for the injections.

Most notable among them was the $50 million that Security First Insurance Co. said it obtained from its parent, effective Dec. 31, 2016. The notes to the company's annual statement listed the receipt of $45 million in paid-in surplus and $5 million in capital changes. They further stated that Security First on Feb. 9 received settlement of $20 million from its parent resulting from the capital contribution, which it recognized in its year-end 2016 financials under SSAP No. 72.

The increases in capital and surplus helped Security First offset the $35.2 million net loss it reported in 2016, which resulted in large part from a $46.3 million net underwriting loss. Security First reported an underwriting loss of approximately $946,000 in 2015. Its 2016 combined ratio of 126.9% stands as the company's highest in a full calendar year since its 2005 launch.

The Florida Office of Insurance Regulation ranked Security First as the state's third-largest personal and/or commercial residential property insurer, based on policies in force as of Sept. 30, 2016, trailing only Universal Insurance Holdings Inc. unit Universal P&C Insurance Co. and the state-run Citizens Property Insurance Corp.

Security First CFO Clive Becker-Jones said the company’s parent is “always ready to infuse capital to keep up with our growth.” He said the company had been “suffering from the issues that have been going on in the marketplace.”

The company recorded $7.4 million in unfavorable prior-year reserve development during 2016. Additionally, Becker-Jones said, Security First is “carrying a very heavy” net operating loss carryforward that “somewhat exacerbated” the income statement challenges it faced relative to certain of its peers.

The unfavorable development and NOL, which totaled $19.1 million as of Dec. 31, 2016, may not “play well in the current year,’ Becker-Jones said, but those items are likely “good for the future.”

The second-largest infusion of paid-in surplus that meets the aforementioned criteria was People's Trust Insurance Co., but the funds the Demotech A-rated company received only partially offset the sharp decline in capitalization it experienced in 2016. People's Trust reported a net underwriting loss of $47.3 million in 2016, compared to a loss of $5.1 million in 2015. Its combined ratio totaled 141.9%, up from 105.4% in 2015.

The company said it obtained FLOIR approval for a $9 million capital contribution from its parent, and that it received the associated cash Jan. 20. With a $26.8 million net loss and a change in nonadmitted assets of negative $19.8 million, however, People's Trust's surplus still plunged by $36 million in 2016 to $51.9 million at year's end.

More broadly, a group of the 30 largest Florida-focused personal and/or commercial residential property insurers, which were generally selected on the basis of their relative positions in Florida Office of Insurance Regulation policies-in-force data as of Sept. 30, 2016 (excluding Citizens and members of the more nationally focused USAA Insurance Group), reported the receipt of $161.7 million in capital classified as paid-in surplus in 2016, up from $45.4 million for the same group of companies in 2015.

Twenty-seven of the 30 companies maintain A-category ratings from Demotech; the remaining three are unrated by Demotech. All but $19.5 million of the paid-in surplus in 2016 pertained to the fourth quarter of the year.

The 30 companies reported the receipt of only $11.1 million in paid-in surplus in the fourth quarter of 2015. They combined to produce a net underwriting gain of $133.1 million in 2016, down from $730.6 million in 2015. The 2016 result would have been a $149 million underwriting loss after excluding State Farm Florida Insurance Co. and Assurant Inc.'s American Bankers Insurance Co. of Florida, each of which produced underwriting profits in excess of $100 million during the year.

Demotech said March 7 that it plans to release ratings affirmations and downgrades no later than March 16. The rating agency praised the industry's response to its February announcement in terms of the capital contributions made and the presence of approximately $200 million of additional reserves relative to year-end 2015.