Typically, the most dangerous tropical cyclones strike Florida and the southeastern United States between mid-August and mid-October. You've heard of hurricanes like Irma, Michael, Katrina, Frances, Ivan, and Jeanne. During that time, all of them made landfall.
On the eve of the time frame, two other devastating storms struck: Hurricane Wilma (October 15 to October 25 in 2005) and Hurricane Charley (Aug. 9 to Aug. 14 in 2004).
All of these major storms caused billions of dollars in damage and weakened the insurance industry, necessitating two rounds of legislative reforms, infusions of private capital investment, and public funding commitments to ensure claims payment if disaster strikes.
Florida's insurance market has been on life support for the majority of the last two years, battered by a torrent of financial woes. Heavy losses sparked widespread concern, just before the official start of hurricane season on June 1, that a large number of companies would be unable to meet the state's minimum financial-strength requirements to protect all property owners in the state.
Their failure so close to hurricane season would have been disastrous for homeowners, whose annual premiums have risen to an average of $4,231, nearly triple the national average of $1,544, according to the industry-funded Insurance Information Institute.
This year, five insurers failed, the most in recent memory. Their failures forced 292,200 policyholders to seek alternative coverage. Another 68,200 cancellations were made after the state directed FedNat Insurance Co. to tighten its belt. Many of the displaced homeowners were forced to use the state-run Citizens Property Insurance Corp., dubbed the "insurer of last resort." Citizens reported this week that it had sold over one million policies for the first time since 2013.
Despite these challenges, all surviving Florida-based insurers have been able to purchase sufficient levels of reinsurance to meet state requirements, according to Paul Handerhan, president of the consumer-oriented watchdog group Federal Association for Insurance Reform.
With the reinsurance purchases, Florida companies will be able to pay all claims following a storm that occurs once every 130 years and a second storm that occurs once every 50 years, according to Handerhan.
That's the level of financial security required by Ohio-based ratings agency Demotech to maintain financial stability ratings of A (exceptional), according to Joe Petrelli, Demotech's president and co-founder.
And, despite a major scare in mid-July when Demotech warned 27 insurers that their ratings were about to be downgraded below an A, potentially triggering a cascade of trouble for Florida's housing market, all but a few Florida insurers were able to retain their A ratings by demonstrating to Demotech that they had resolved their issues, including securing their reinsurance buys and improving their financial performances in the second quarter.
According to Petrelli, insurers who were notified of impending rating downgrades have since presented information from their second-quarter operating results. According to him, these reports show improvements over their first-quarter results. "In addition, some carriers infused additional capital to sustain them while their revised business plan is implemented and fully functional."
Only two named storms are covered by reinsurance.
Many Florida insurers were able to improve their financial results in the second quarter due to rate increases, non-renewals of policies covering older homes, and swapping full-value roof replacement coverage for depreciated-value coverage, according to John Rollins, former chief risk officer at Citizens and current director of ventures at Texas-based Evans Insurance Group.
However, most insurers are only covered for two named storms, have limited coverage for adjuster-related expenses, and were required to pay their reinsurance bills in full in July, leaving some with insufficient funds.
"We're in an uneasy equilibrium until the wind blows," he explained. "If there are no storms, those who purchased just enough reinsurance will be able to survive and build some capital." If the wind continues to blow, cash shortages will resume as the first wave of claims is paid out."
A hurricane occurring once every 130 years has never been recorded. The Great Miami Hurricane of 1926 came the closest, causing $235 billion in damage in today's dollars, devastating South Florida's burgeoning economy, and killing 372 people.
Some businesses may face financial difficulties if more than two storms hit Florida this year, according to Handerhan.
To access its reinsurance, a company must first spend 10% of its surplus on claims, much like homeowners must pay a deductible before seeking reimbursement from their own insurance policies. However, the 10% requirement applies to each storm. If a second storm strikes, the company will have to spend another 10% of its surplus before it can access its reinsurance coverage for that storm.
Companies will have to purchase more reinsurance in the middle of hurricane season if two major storms strike. This cost, combined with any additional 10% deductibles, could put businesses in jeopardy before the end of an unusually active storm season, according to Handerhan.
Because of five years of net losses, increased frequency of small but costly events like hail and tornadoes in northern areas of the state, and high levels of claims litigation, the amount of reinsurance coverage offered to Florida insurers this year was reduced compared to previous years. What was made available was more expensive than in previous years, prompting some insurers to purchase only the bare minimum.
If businesses are forced to purchase more reinsurance during the hurricane season, "it's going to be difficult to get, and if you can get it, it's going to be expensive," Handerhan predicted.
Reinsurance is critical for Florida's smaller insurers, which dominate the property insurance market. Two insurers, Weston Property & Casualty and Southern Fidelity, declared bankruptcy in the last two months due to a lack of funds to purchase required amounts of reinsurance. They were the fourth and fifth insurers to fail this year, following Lighthouse Property Insurance Co., Avatar Property & Casualty, and St. Johns Insurance Co. in the spring.
After all, Demotech gives A ratings.
Maintaining an A rating from Demotech is also important because Fannie Mae and Freddie Mac, the federal mortgage loan guarantors, will not accept anything less from a Demotech-rated company. Homeowners with insurers rated below A may be forced to purchase force-placed coverage, an expensive alternative often sold by companies that are not regulated by the state.
That's why, after learning that Demotech had sent letters to at least 17 companies warning of impending downgrades below A, Insurance Commissioner David Altmaier and Florida Chief Financial Officer Jimmy Patronis took the unusual step of publicly chastising Demotech in July.
Demotech, according to Patronis, is a "rogue ratings agency" that is "wreaking havoc on the financial lives of millions of Floridians." He asked leaders of the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac to allow Florida to replace Demotech with a ratings agency.
According to Petrelli, Demotech sent letters to 27, not 17, companies, warning them of impending downgrades.
Soon after, Altmaier announced that the state had formed a "temporary market stabilization agreement" in which Citizens pledged its $11.3 billion claims-paying capacity to cover any claim left unpaid by an insurer failure. This promise, according to Altmaier, should assuage the federally backed mortgage guarantors' concerns about ratings downgrades and subsequent bankruptcies.
However, since Demotech confirmed A ratings by 28 Florida-based insurers on August 1, only one company has applied for coverage under the temporary agreement — United Property & Casualty, which was downgraded from A to M (moderate) on August 1.
United is the only company that has been downgraded below A since August 1. A few others, including Weston, had their ratings revoked just before the state placed it in receivership. Two companies' ratings were withdrawn because they no longer wanted to be rated by Demotech. FedNat Insurance, which continues to restructure and downsize under state guidance, was downgraded from A to S in April (substantial). On Aug. 1, Demotech withdrew its rating altogether.
The federal mortgage guarantors' spokespeople did not respond on Friday to questions from the Sun Sentinel about whether they would waive their A rating requirements in response to the state's backstop.
However, Mark Friedlander, communications director for the insurance industry-funded Insurance Information Institute, said he learned from a "impeccable" inside source that the state-sponsored enterprises have not yet agreed to accept the state's temporary reinsurance plan in lieu of a Demotech A rating.
The mortgage guarantors are permitted to use "an acceptable reinsurance arrangement" in lieu of an acceptable financial stability rating, according to a spokeswoman for the Florida Office of Insurance Regulation.
"OIR is confident that the temporary market stabilization arrangement qualifies companies for an exemption, and we'll continue to provide updates as they become available," she said.
'Maintained by chewing gum'
Stacey Giulianti, chief legal officer of Florida Peninsula Insurance, said homeowners can be confident as hurricane season approaches.
"With the exception of a few, smaller companies that were unable to secure reinsurance coverage," he said, "the remainder of the marketplace is exceedingly strong and financially sound." Giulianti went on to say that "from an economic standpoint, this year is probably safer than any other year," referring to the state's market stabilization agreement and the Florida Hurricane Catastrophe Fund's $16 billion in reinsurance capacity.
While insurers' reinsurance coverage may be sufficient to protect policyholders and the market's overall health through no more than two storms, Rollins admitted, "Bottom line, it's all held together by chewing gum now."
"We better hope that a major hurricane does not strike Florida," said Chip Merlin, founder and president of Merlin Law Group, which represents policyholders in lawsuits against insurers. If that is the case, all bets are off regarding companies' ability to maintain their Demotech A ratings."
Friedlander has a different point of view. Since a special legislative session in May that limited attorneys' fees and allocated an additional $2 billion in state-funded reinsurance to troubled companies, he said in an email.
"All have pointed to the state legislature's lack of decisive action to address the root causes of the financial crisis confronting insurers: roof replacement schemes and excessive litigation," he said.
Though Handerhan noted that legislative reforms enacted in the last two years have begun to improve companies' financial performance, Friedlander countered, "There are no indications that property reform legislation passed in the last two years is having any positive impact on the market."
"In our opinion, the Florida residential insurance market continues to deteriorate and remains the most unstable in the United States," he said.