Guidance Suspended for Florida Property Insurers – Rating Revisions Expected in March

Columbus, Ohio, February 6, 2017 For most of 2016, severe weather hammered the Sunshine State. The Cape Coral tornado struck on January 9, 2016. The dissipation of Hurricane Matthew on October 6, 2016, completed the year of severe weather. Having reviewed projected year-end financial results of 2016 prior to their release, Demotech can report that every carrier we review and rate survived the severe weather and is expected to report year-end 2016 operating results in a timely manner. Although the 57 property insurers that Demotech reviews, rates, and follows were able to respond to Florida’s weather related damages during 2016, we suspend previously written guidance applicable to property insurers writing in Florida due to the recent judicial reversals of industry claims procedures which remain intact in other operating environments. The remaining 340 carriers rated by Demotech are not impacted by this communication.

Demotech’s review and analysis process focuses on the ability of carriers to implement their business plan through a business model. Although a rigorous review of the sufficiency of premiums, adequacy of loss and loss adjustment expense reserves, and the quality and quantity of reinsurance are key components of our analysis, the ability of carriers to implement business plans is also heavily dependent on the operating environment. Claims procedures, processes, and protocols utilized in the past must be replicable in the future if loss experience is to be predictable and claims handling scalable. The assignment of benefits (AOB) situation in Florida is unlike any other in the United States and two recent court decisions, Johnson (September 2016) and Sebo (December 2016), have also revised claims procedures, practices, and protocols from the industry standards that previously existed to a “Florida only” standard.

In response to these revisions to established practices, Demotech is suspending its guidance pending Florida’s reversion to property insurance claims procedures, practices, and protocols that are identical, or at least more similar, to Florida’s past practices or other scenarios in use throughout the country.

Additional concern was created on January 31, 2017, when the Florida Supreme Court decision overturned lower court rulings related to legal fees awarded to a law firm whose fees had been capped in a claim bill authored by the legislature in 2012. The Florida Supreme Court declared the cap on the legal fees, as approved in a 2012 claim bill and upheld by lower courts, unconstitutional. A micro-decision of the legislation, passed in 2012, to address a single claim was utilized to declare capping of legal fees unconstitutional. This decision implies to us that the Florida Supreme Court need not recognize the intent of the legislature.

We will continue to review, rate, and monitor insurers, provide analysis, communicate with management, and otherwise perform as we have in the past; however, we will need to do so with a focus on the carriers’ responses to the challenges raised by AOB and the Johnson and Sebo cases in the execution of their business plans.

Every carrier that met each aspect of the previously applicable, now suspended, guidance can focus on addressing AOB and the implications of Johnson and Sebo on its business model. As to the carriers that were asked to infuse additional capital, some will benefit from the application of Statutory Statement of Accounting Principles Number 72 (SSAP 72). SSAP 72 provides insurers with the opportunity to address financial matters subsequent to year-end if the result is accomplished prior to the timely publication of the annual statutory financial statement, which is March 1 of the subsequent year.

To comply with SSAP 72, action must have occurred prior to February 28 and reflected in the year-end 2016 annual statement. Absent the necessary enhancements to balance sheets to meet the requirements underlying the assignment of Financial Stability Ratings® (FSRs), some carriers face potential downgrades.

Going forward, in response to the recent judicial reversals of claims procedures and the change in the operating environment, Demotech is undertaking a review of its protocols to respond to the implicit albeit yet unquantified changes in the operating environment. Concurrently, we will continue to provide all carriers in catastrophe prone jurisdictions with objective catastrophe reinsurance evaluation criteria and our initial thoughts on the review and analysis process of vertical and horizontal catastrophe reinsurance programs for the 2017 storm season in all jurisdictions. We must do so because judicial decisions that significantly alter the claims procedures, practices, and protocols underlying historical operating results are problematic to financial analysts and others because historical information, trends, and financial data may no longer be applicable.

Pricing insurance policies is a prospective process. Carriers and their actuaries price tomorrow’s policies based upon the claims and experience from yesterday and today. When changes occur in claims procedures, practices, and protocols, the utility of historical experience is diminished. Similarly, with insurance policies issued for twelve month periods, court decisions that markedly change claims procedures, practices, and protocols mid-term are problematic to carriers, insurer rating agencies, and actuaries.

Carriers that we review and rate have addressed weather events with rigorous vertical and horizontal catastrophe reinsurance programs; however, no carrier can be prepared for the impact of the Johnson and Sebo cases, which were less than 100 days apart, being superimposed on the challenges associated with an AOB protocol unlike that of any other jurisdiction.

In summary, suspension of guidance provides us the opportunity to continue Demotech’s candid conversations with carriers who withstood the worst that 2016 weather threw at them as well as those carriers who are in the process of responding to our previous communication. Having had such conversations and assessing the potential impact of Matthew for each carrier that we review, the carriers should understand our opinion of the projected calendar year 2016 results that they shared with us. Concurrently, SSAP 72 has provided carriers with additional time to address matters that affected their balance sheet at December 31, 2016.

AOB continues to manifest itself in the claims experience of carriers and the recent Johnson and Sebo decisions are judicial revisions to industry claims protocols and practices. Every carrier that we review and rate must understand there is no implicit assumption that an FSR remains intact once year-end 2016 information is publicly available and SSAP 72 has not been utilized to address our concerns. As year-end 2016 financial information becomes public, we will review any SSAP 72 activity that occurred in 2017 and speak with clients.

In addition, we will be evaluating and implementing revised reinsurance evaluation procedures for all catastrophe exposed property insurance carriers countrywide prior to the start of the 2017 storm season. The revised reinsurance evaluation procedures will be more stringent than the procedures in our suspended guidance. Accordingly, they may be phased in over time.

Although the suspension of our guidance to property insurance carriers, the AOB situation, and the impact of recent judicial decisions creates a fluid situation in Florida, Demotech will make its primary analysts available to speak to interested parties on February 10, 2017, at 2:30 PM Eastern and again at 4:30 PM that same day via conference call. Interested parties should call (800) 371-9219 and use code 7942332#.

About Demotech, Inc.

Demotech, Inc. is a financial analysis firm specializing in evaluating the financial stability of regional and specialty insurers.  Since 1985, Demotech has served the insurance industry by assigning accurate, reliable and proven Financial Stability Ratings® (FSRs) for Property & Casualty insurers and Title underwriters.  FSRs are a leading indicator of financial stability, providing an objective baseline of the future solvency of an insurer.  Demotech’s philosophy is to review and evaluate insurers based on their area of focus and execution of their business model rather than solely on financial size.  Visit for more information.