Florida’s homeowners insurance market is in a perilous, precarious position. Florida has not been struck by a hurricane since 2018, yet there have been seven Florida insurer insolvencies in the recent hurricane-free years, including three so far this year. Hurricane Andrew, which caused $31 billion (inflation-adjusted) in insured losses in 1992, also caused seven Florida insurers to topple three decades ago. If seven Florida insurers have failed in the current period bereft of hurricanes, how many more Florida insurers will fall when hurricanes make their inevitable return to the peninsula and the panhandle?

1992-1993 Failures from Hurricane Andrew Number of Fla. Homeowner Insurance Policies 2017-2022 (through April 28) Failures Number of Fla. Homeowner Insurance Policies
Regency Insurance 10,902 Federated National Insurance (ratings downgrade) 152,000
MCA Insurance 12,000 St. Johns Insurance Company 140,000
Great Republic Insurance Company 5,395 Avatar Property & Casualty Insurance Company 42,000
Ocean Casualty Insurance Company 21,000 Gulfstream Property & Casualty Insurance Company 33,000
Florida Fire & Casualty Insurance Company 11,000 American Capital Assurance Corporation 2,300
Nova Southern Insurance Company 9,300 Florida Specialty Insurance Company 90,000
Guardian Property & Casualty Insurance Company 9,355 Sawgrass Mutual Insurance Company 17,778

 

In looking at the post-Andrew insurer failures compared to today’s issues, there are some troubling concerns. The seven Florida insurers that fell in 1992-1993 were small players, lightweights and flyweights, with approximately 80,000 policies combined. The recent failures included larger insurers, cumulatively covering 461,000 policyholders, close to 5 percent of the Sunshine State’s housing stock. What’s more, Hurricane Andrew catalyzed the development and use of data-driven catastrophe models that enable insurers to understand and manage their exposure to natural disaster events. Post-Andrew, insurers had a much better sense of their risk accumulations, and became more sophisticated in their purchases of reinsurance to protect against exposure concentrations that could lead to outsized losses. Yet with all of today’s risk management tools, insurers are collapsing more often than in the days before modeling.

Failures of property and casualty (P&C) insurance companies are rare events. Insurers typically have fortress balance sheets, with assets several times their annual revenues to generate investment income, offsetting underwriting losses. In the entire P&C industry, with approximately 2,900 U.S.-domiciled insurers, the number of annual impairments is typically in the low-medium single digits, or 0.2 percent of the total population. There were only five impairments of U.S. P&C insurers in 2019, four in 2018 and seven in 2017. The fact that there are now several Florida insurers failing each year at a time when the state has been spared from landfalling hurricanes should be a cause for alarm.

When Middleweights Fall

Another concerning feature of the current string of Florida insurer failures is that one of the fallen is the publicly traded Federated National (FedNat) Insurance, a middleweight carrier with $584 million in 2021 net written premium. In its 2021 10-K form, released on April 25, 2022, FedNat reported “The Company has recently concluded that there is substantial doubt regarding its ability to continue as a going concern under Generally Accepted Accounting Principles.”

Most of FedNat’s business is in Florida, but it had the misfortune of writing homeowners insurance in Texas and Louisiana as well—states that were battered by storms in 2021 (winter storm Uri and hurricane Ida). The FedNat Group holding company includes three insurers: FedNat Insurance, Monarch National Insurance Company and Maison Insurance Company. Florida accounted for 71.1 percent of FedNat’s premium, followed by Texas with 13.0 percent, Louisiana at 7.2 percent, South Carolina at 6.5 percent and Alabama at 1.6 percent.

FedNat’s fall is not attributed solely to Uri and Ida. The company had poor underwriting performance in years prior to 2021. The combined ratio, a measure of underwriting profitability or lack thereof was elevated, with large underwriting losses in four of the past five years. A combined ratio over 100 percent indicates an underwriting loss, with losses and expenses outstripping premium.

Year Combined Ratio (%)
2017 110.0
2018 98.4
2019 110.0
2020 145.1
2021 185.1

(Source: S&P Global)

No Simple Solution

We have analyzed the root cause of the Florida insurance crisis, and have put forth recommended responses in a recent article and blog post. Our analysis concludes that the cause of the Florida insurance crisis is not the weather. It is a man-made crisis, not a natural catastrophe crisis. It is an explosion in litigation enabled by a legal and legislative climate that has stoked loss frequency and severity to the breaking point.

In the past decade, Florida’s insurance market has limped from one crisis to another, driven by litigation surrounding sinkholes, mold, construction defect, water damage, one-way attorney fees, assignment of benefits and unscrupulous roof contractors. Like a severely ill patient with many co-morbidities, there is no simple remedy that can solve the Florida insurance mess. The Florida Legislature plans to have a special session during the week of May 23 to address and tackle these issues. The problem is likely too complex to expect meaningful solutions to emerge this month, but we can hope for constructive dialogue and fact-based analysis. But in the meantime, the question is: who will be the next to fall?

Top 25 Florida Insurers 2021 Direct Written Premium (in $ millions)
Universal Property & Casualty Insurance 1,300
Citizens Property Insurance Corporation 1,260
State Farm Insurance 827
Tower Hill Insurance Group, LLC 642
Progressive Insurance 541
USAA 509
First Protective Insurance Company 482
HCI Group, Inc. 482
Florida Peninsula Insurance Company 466
Heritage Insurance 405
UPC Insurance 401
FedNat Insurance Company 362
American Integrity Insurance 345
Chubb 338
Allstate Insurance Company 322
Security First Insurance Company 306
AIG 263
Tokio Marine HCC 218
Olympus Insurance Company 204
People’s Trust Insurance 194
Farmers Insurance 184
Auto Club Insurance Company of Florida 145
Southern Farm Bureau 142
Florida Family Insurance Company 139
Southern Oak Insurance Company 132

(Source: S&P Global)

Image: Michael O’Keene