Recent Developments in the Florida Property Insurance Market

Columbus, Ohio – October 22, 2009

There have been insolvencies of property insurance writers in Florida that have been reported over the past several months.  This correspondence provides background perspective as well as our timeline on some of the situations that we observed.  As we review the companies that we rate on at least a quarterly basis, I am taking this opportunity to summarize the critical factors regarding American Keystone Insurance Company, Coral Insurance Company, First Commercial Insurance Company and First Commercial Transportation and Property Insurance Company.

American Keystone Insurance Company

On October 9, 2009, the State of Florida Department of Financial Services ordered American Keystone Insurance Company (American Keystone) into rehabilitation. On September 11, 2009, American Keystone had been downgraded to a Financial Stability Rating® (FSR) of M, Moderate, our lowest descriptive FSR, from an FSR of S, Substantial.  After American Keystone was ordered into rehabilitation, our FSR of M was withdrawn.

During an analysis of American Keystone’s August 2009 financial statements submitted to the State of Florida Office of Insurance Regulation, the Office noted that American Keystone’s surplus as regards policyholders was $3,664,851, $335,149 below the minimum required by statute.  During the review of cash flow projections received by the Office from American Keystone on September 15, 2009, the Office determined that American Keystone owed approximately $8.8 million to the Florida Hurricane Catastrophe Fund and about $7.2 million to private reinsurers.

These reinsurance payables represented about $16 million of reinsurance payable and were not recognized as earned on the August 2009 financial statements submitted to the Office of Insurance Regulation.  The Office commented that if the future payments due reinsurers had been recognized as earned on the August 30 financial statements, surplus would have been negative.

In stark contrast to $16 million of ceded reinsurance being due and payable at August 30th, the June 30, 2009 quarterly statement presented to Demotech by American Keystone reported that it was due a credit of approximately $5.5 million as regards reinsurance payable.  Refer to page 3, line 12 of the June 30, 2009 financial statement distributed by American Keystone.

Had American Keystone consistently recorded and reported ceded reinsurance balances in its financial statements, particularly at June 30, 2009, its financial situation would have been fairly presented.  In other words, a payable of nearly $16 million was revealed to the OIR despite a contra-liability (credit) of $5,489,948 being presented in its (preceding) quarterly financial statement.

Coral Insurance Company

On March 27, 2009, the State of Florida Office of Insurance Regulation issued an Order suspending Coral Insurance Company’s (Coral) certificate of authority for six months due to Coral’s surplus as regards policyholders being below the minimum required by the State.  We subsequently withdrew our Financial Stability Rating® of A, Exceptional, on March 30, 2009. On April 9, 2009, prior to the end of the six month suspension, the State of Florida Department of Financial Services ordered Coral into rehabilitation.

Prior to the withdrawal of our FSR, United Insurance Holdings Corporation and Coral had negotiated a non-binding letter of intent to acquire substantially all of the assets and assume certain liabilities of Coral, LLC.  Furthermore, in February 2009, Coral had made a decision to cease writing new business.  These factors, in conjunction with a multi-million dollar capital infusion that was negotiated and completed in the fourth quarter of 2008, created a scenario in which we were comfortable with the financial information presented to us.

However, on March 30th when we made our decision to withdraw Coral’s FSR of A, Exceptional, we were informed that Coral’s auditor discovered that a reinsurance recoverable of approximately $2 million had been booked incorrectly and was inaccurately presented during the preparation of Coral’s year-end 2008 financial statement.  The correction resulted in a $4 million difference in surplus because the correction resulted in a $4 million debit, i.e., $2 million to reverse the erroneous credit and another $2 million to properly account for the charge.& Despite these revisions, Coral ended 2008 with a positive net worth of nearly $1.8 million.

The underlying issue was the preparation of inaccurate financial statements.  The inaccuracies were identified by Coral’s independent auditor.

First Commercial Insurance Company
First Commercial Transportation and Property Insurance Company

First Commercial Insurance Company and First Commercial Transportation and Property Insurance Company were placed into liquidation on August 24, 2009. The State of Florida Department of Financial Services is the court appointed Receiver of the companies.  Our internal file notes indicate that over the period February 2, 2006, through June 11, 2009, Demotech, Inc. declined to assign any level of FSR to either of the companies.  At no time did the published financial statements of these companies warrant the assignment of any level of Preliminary FSR.


We review and analyze filed quarterly financial statements of the insurance companies that we rate.  We may also obtain interim monthly information.  However, only year-end financial information can be relied upon as having been audited by third parties.  When reviewing quarterly financial data, every rating service relies upon the information provided to it.  Neither Demotech nor any rating agency independently verifies the accuracy or reliability of the financial information submitted to them.  Accurate financial information is a critical component of the review and analysis process.

I trust that this summary clarifies what has transpired over the past several months.  Should you have any questions or desire additional information, please contact me.


Joseph Petrelli

Demotech, Inc.