According to the terms of a consent order filed Friday by the state Office of Insurance Regulation, more than 68,000 policies of the troubled Sunrise-based FedNat Insurance Company and its sister companies Maison and Monarch National will be canceled by the end of June.
The order comes after ratings firm Demotech downgraded FedNat's financial stability rating a month ago. The cancellations, designed to help FedNat Holding Company survive after reporting $103.1 million in reported losses in 2021, will force displaced policyholders to scramble to secure coverage just as hurricane season begins.
They'll have to shop for insurance in an unprofitable market that has forced privately held companies to cancel or not renew high-risk policies while raising rates for existing customers. Hundreds of thousands of policies have been sent to the state-owned Citizens Property Insurance Corp., the so-called insurer of last resort, after numerous companies stopped writing new policies in the state.
"I'm not sure what companies will be willing to take on these policies," said Sen. Jeff Brandes, a Republican from Tampa Bay and a leading advocate for legislative reforms to stem losses blamed on fraud, inflated claims, and excessive lawsuits. "Most Florida-based businesses want to shrink rather than grow." I believe Citizens will receive a majority vote."
The cancellations are part of a rehabilitation plan that FedNat was required to submit after its rating was downgraded from A - "Exceptional" to S - "Substantial." Fannie Mae and Freddie Mac, the federally funded mortgage loan guarantors, require borrowers to maintain coverage with A-rated insurers. Demotech CEO Joseph Petrelli stated at the time of the downgrade that FedNat could potentially restore its A rating with an infusion of capital that would allow it to enter the hurricane season with sufficient claims-paying capacity.
FedNat Insurance Co. will cancel 56,500 personal residential policies, Monarch will cancel 8,400 policies, and Maison will cancel 3,300 policies under the plan. The cancellations will be announced 45 days in advance to the 68,200 policyholders.
FedNat Insurance Co. will transfer the remaining 83,000 policies to Monarch, which has agreed to provide capital "through an acquisition" with a new investor, according to the consent order. Meanwhile, FedNat Insurance Co. will cease operations and cease writing new business.
Single-family home owners, condo owners, and renters will all be affected.
The consent order, signed by Insurance Commissioner David Altmaier, described early policy cancellation as "an extraordinary statutory remedy reserved to address insurers that [without the cancellations] are or may be in perilous financial condition."
While it is unfortunate that 68,200 policyholders will be canceled and likely end up in Citizens, Paul Handerhan, president of the Federal Association for Insurance Reform, a consumer-oriented watchdog group, stated that FedNat's rehabilitation plan is "the best alternative of a bad situation, resulting in 80,000 policyholders being able to maintain their insurance coverage."
According to the consent order, without the cancellations, the three companies would be unable to secure adequate reinsurance coverage for the 2022-23 hurricane season and maintain a sufficient level of surplus to meet state financial stability requirements.
According to Brandes, the developments are yet another sign of an insurance market on life support. "This is not a small business," he explained. "This is one of Florida's largest insurance companies and one of only a few publicly traded companies."
Reinsurance is coverage purchased by insurers to ensure that they can pay claims following catastrophic weather events.
In a note to investors issued on May 9 in conjunction with FedNat's announcement of a $31.3 million net loss in the first quarter of the year, the company's principals stated that the company would continue its efforts to exit states other than Florida and reduce its Florida policy count.
The company would become "much smaller, with significantly fewer policies in force, and potentially result in additional capital coming into the holding company or into our insurance carriers," according to the rehabilitation plan it submitted. The policy change "is expected to allow the company to obtain excess-of-loss reinsurance on a smaller, Florida-only book of business."
FedNat attributed $29 million of its first-quarter losses to 11 "notable" weather events, including a wildfire, that hit Florida, Texas, Louisiana, and South Carolina in the first few months of the year.
Severe weather, such as the prolonged winter freeze in Texas that caused widespread burst water pipes, also contributed to 2021 losses. In August, Hurricane Ida wreaked havoc in Louisiana.
Last year's net loss of $103.1 million followed a $78.2 million net loss in 2020, which the company blamed on five hurricanes that hit policyholders in southern states.
The firm is one of five publicly traded insurers headquartered in Florida. FedNat insured 189,644 Florida policyholders in June 2021, but has since reduced that number to 140,000 as of May 12, according to the consent order. FedNat CEO Michael Braun stated on a May 10 earnings call that the company had dropped approximately 100,000 policies in the previous year.
Meanwhile, policy costs for the company's customers have more than doubled in the last five years, according to Braun.
Records show that the company insured 56,465 homes in Broward, Palm Beach, and Miami-Dade counties in 2019, the last year it released county-by-county policy counts before declaring that information "trade secret."
The consent order does not specify how the cancellations will be distributed among policyholders across the state or whether private market companies will be able to absorb them. Many, if not most, people may have no choice but to join the state-run Citizens.
Citizens has added approximately 6,000 policies per week since March and is now approaching 1 million policies, up from 420,000 in 2019. Lawmakers warn that allowing Citizens to grow too large exposes nearly all insurance customers in Florida to special financial assessments if Citizens is unable to pay claims following a catastrophic storm season.
The cancellations come at a critical juncture in the insurance market in Florida. Four private-market firms have gone out of business in the last year, and several are rumored to be struggling to meet their reinsurance requirements in time for hurricane season.
On May 23, the state Legislature will convene for a five-day special session to address the state's skyrocketing home insurance costs and dwindling availability.
Possible solutions include limiting the availability of fees that plaintiffs' attorneys can earn in claim settlements. Insurance companies claim that loopholes in Florida insurance laws encourage attorneys to collaborate with repair contractors to inflate invoices and file multiple lawsuits against insurers, resulting in destabilizing financial losses.
Brandes stated that legislation for the special session is being drafted by Gov. Ron DeSantis and the leaders of the state House and Senate, and that he expects bills to be filed by Wednesday. He believes the crisis will worsen unless the bills address claims abuse, excessive litigation, and attorney fees. "If you don't turn this ship around, it'll rub against the iceberg until it sinks," he warned.