What to Expect in Florida Property Insurers’ Year-end 2018 Financial Statements

Columbus, Ohio, February 27, 2019: Having reviewed, analyzed, and affected the anticipated year-end 2018 financial statements of the fifty-two Florida focused carriers that we review and rate, Demotech offers the following observations to those who will review these financial statements as they become public:

• Expect underwriting and operating losses. Matthew, Irma, and Michael represented a named event for each of the past three years. Operating profits proved to be elusive for many.

• Expect additional loss and loss adjustment expense reserve strengthening. Carriers have had several years to adjust to the difficult operational environment associated with assignment of benefits (AOB) and other judicial precedents that expanded insurer liability and resulted in Florida being named the top Judicial Hellhole by the American Tort Reform Foundation (2017-2018). Demotech has consistently prodded many carriers to move their loss and loss adjustment expense reserve selection from the midpoint to the upper end of their actuary’s range of results. In mid-year 2018, Demotech advised many carriers to get the adverse reserve development behind them. To do so requires that the year-end 2018 statement present significant reserve development in the pursuit of reserve adequacy and future neutral or favorable reserve development.

• Understand that CAT losses take time to develop. Although much of the loss and loss adjustment expense reserve strengthening was related to AOB and other judicial decisions that eroded claims procedures, protocols, and practices associated with previously accepted interpretations of policy coverage, Demotech also requested a review of the relatively small number of open claims remaining from Irma. Irma was the strongest storm observed in the Atlantic in terms of maximum sustained winds since Wilma and was the fifth-costliest tropical cyclone in recorded history, with damages of $65 billion.

• Expect capital contributions to offset reserve strengthening. Carriers that increased their loss and loss adjustment expense reserves were required to infuse capital to maintain policyholder’s surplus at a level that sustains the Financial Stability Rating® assigned.

• Expect premiums to rise. The need to move outstanding loss and loss adjustment expense reserves to a more adequate level carries with it the acknowledgement that the anticipated loss and loss adjustment expense levels in an insurer’s current premium structure understated the premium and a higher premium should have been promulgated.

• Know that Demotech will not relax our reinsurance requirements should the cost of catastrophe reinsurance protection change. The current reinsurance environment is viewed as competitive and soft, a buyer’s market. Despite a market characterized as soft, carriers currently cede 40-60% or more of their gross written premium to secure meaningful levels of catastrophe reinsurance protection. Should the cost of catastrophe reinsurance increase suddenly or markedly, the business models of several insurers will collide with a financial reality that impinges on their ability to sustain the Financial Stability Rating® currently assigned.

Over the next several months, our analysts will be focused on:

1. affirming that the published year-end 2018 financial statements are consistent with the year-end 2018 financial information provided to us in January and February

2. issuing guidance for catastrophe reinsurance programs for the 2019 storm season

3. issuing data calls for catastrophe reinsurance programs

4. reviewing preliminary catastrophe reinsurance programs

5. reviewing first quarter 2019 financial statements

6. reviewing final catastrophe reinsurance programs

7. reviewing the claims paying ability of the Florida Hurricane Catastrophe Fund

8. reviewing Statements of Actuarial Opinion and Actuarial Opinion Summaries

9. reviewing audit reports (with footnotes), including those of holding companies

10. internally reviewing the financials of participating catastrophe reinsurers.

We have been in regular communication with our rated companies to ensure that they are clear about our requirements and expectations. Just as we do not anticipate surprises from the filed year-end 2018 financial statements, our rated clients should not be surprised by any rating actions we take based on our previous discussions.

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 www.demotech.com for more information.