Now you can listen to Insurance Journal articles in New York!
The Demotech rating firm has withdrawn the financial rating stability of Frontline Insurance Group, parent to two significant property insurers in Florida.
The financial state of the insurers was not determined by the termination of Frontline company ratings, but according to a news release on January 5th, it was Demotech’s choice. Company officials, speaking on the condition of anonymity, confirmed that the connection with Demotech has been severed and the insurers have willingly withdrawn their rating requests. Frontline corporate executives were unavailable for comment regarding this decision. As a result of discontent with the Demotech rating procedure, the insurers have terminated their affiliation with Demotech.
The firm, KBRA, gave a rating of “BBB+” in December for companies marked as stable and carriers, according to the Bond Rating Agency. First Protective Insurance Co. And Frontline-based Unlimited Insurance Co., Both based in Mary Lake, are now rated by KBRA.
While not a top financial health rating, a BBB+ stamp is considered acceptable by Fannie Mae — but not by Freddie Mac, according to mortgage purchasers’ selling guides.
If homeowner insurance companies are not rated or rated poorly, homeowners might need to search for alternative coverage or be compelled to opt for pricier policies. Smaller banks purchase mortgages from the Federal Home Loan Mortgage Corp, also known as Freddie Mac. On the other hand, larger commercial banks typically sell the majority of their mortgages to the Federal National Mortgage Association, commonly referred to as Fannie Mae. This situation could potentially affect certain homeowners.
KBRA, a rating firm, does not include Mac’s Freddie in its list when it is uncertain, and KBRA does not guide. Other rating firms, such as BBB: Global, P&S: BBB or better, KBRA: A or better, Demotech: B or better, and Best: AM, have their own rating levels. Mortgagees and lenders must meet one of these rating levels in order to sell property insurance notes for mortgage loans, according to Fannie Mae’s Selling Guide.
In recent years, insurance providers in Florida have frequently faced financial difficulties when a rating withdrawal takes place. The recent declaration made by Demotech, indicating the reduction in Frontline’s rating, has caused concern among insurance agents and homeowners’ associations in Florida.
According to AM Best, First Protective, a property and casualty insurance provider covering multiple perils, held a 3.9% market share in the Florida homeowners’ market, with $482 million in direct written premium as of July last year. In the case of liquidation, the Florida Insurance Guaranty Association is not obligated to cover the outstanding claims of surplus lines carriers. State regulators may have limited power to demand the return of unearned premiums in the event of insolvency since Frontline Insurance Unlimited, a surplus lines carrier, is subjected to fewer insurance regulations in Florida compared to admitted carriers. The concerns were further heightened.
Over the past few years, the Florida market has experienced significant upheaval due to escalating legal disputes and reinsurance expenses. Certain individuals within the insurance sector argued that the cautionary statement merely mirrored the extremely precarious state of the Florida market. Last July, Demotech caused a major uproar by declaring that up to 16 Florida carriers could potentially encounter downgrades or withdrawals in their ratings.
But state regulators and the Florida Association of Insurance Agents were outraged, and sharply criticized Demotech for failing to adhere to its own criteria and failing to consider other factors in the flagged insurance companies’ financial outlooks. State officials this fall commissioned a study to explore alternatives to Demotech, which over the last 25 years has become the dominant rating firm for Florida-based insurers.
The Florida Office of Insurance Regulation also gave its approval to a plan that permits Citizens Property Insurance Corp. To serve as a safety net, covering certain claims for bankrupt insurance companies when necessary. This effectively bypasses the requirement for an excellent rating. In December, Fannie Mae and Freddie Mac announced their acceptance of the cut-through endorsement plan.
Joe Petrelli, the President of Demotech, could not be contacted for comment on Tuesday regarding the withdrawal of Frontline Group’s rating.
On Tuesday, KBRA announced that ProCentury, National Williamsburg Insurance, and AmeriTrust Co., Surety Century Co., Insurance Star and its subsidiaries received a rating of “A-” from reviews and ratings by KBRA. These companies withdrew from Florida voluntarily, which used to be considered unusual. Additionally, KBRA affirmed its rating of “BBB” for AmeriTrust Group Insurance.
KBRA did not explain why AmeriTrust withdrew its favorable financial ratings request, except for those of All News, ProCentury, and Florida, which are authorized in business.
KBRA stated in a press statement, “The combined ratio has significantly improved in recent times, demonstrating more steady reserves, execution of improved underwriting initiatives, and the removal of fronting fees.” “AmeriTrust’s ratings indicate its positive operating metrics influenced by robust surplus expansion and efficient utilization of a dual admitted/non-admitted structure.”
Some agents in Florida may be concerned that Frontline may not be in good shape, especially after potentially heavy losses from Hurricane Ian in late September. This concern arises from the fact that Frontline reported a net income of just $2 million for the first six months of 2022, followed by a slight loss according to the financial information posted by the Florida Association of Insurance Agents’ Best AM.
According to the report, the combined ratio, which is an indicator of profitability, has been consistently improving in the past few months. Frontline has consistently kept a policyholder surplus ranging from $30 million to $34 million throughout 2021 and 2022.
Just in August 2022, Demotech awarded Frontline with an “A Exceptional” rating.
In a statement released in August, Frontline CEO Porter Leman emphasized our ongoing commitment to our customers by reinforcing the announcement. He highlighted that our exceptional financial strength and resilient business model have consistently enabled us to serve business owners and homeowners with a high level of financial stability.
Moreover, the favorable rating announcement made by KBRA in December indicated that the carriers of Frontline are in good health.
KBRA stated that Florida appears to have performed well in terms of handling claims and having strong underwriting, resulting in positive financial outcomes. This is primarily due to elevated natural catastrophe losses reported by both companies in the last three of the past five years.
“The statement made by KBRA states that the concentration of companies in hurricane-prone states has a significant impact on their reinsurance. In comparison to their peers in Florida, each company generally compares their leverage, premium, and capitalization targets unfavorably. However, the statement also mentioned that the relation is favorable.”
Property insurance is provided by Frontline Insurance and First Protective in Alabama, Florida, Georgia, North Carolina, and South Carolina. As indicated on the website, Frontline was established in 1998. However, the withdrawal of Demotech’s rating was not mentioned on Frontline’s website on Tuesday.
This article has been revised to demonstrate that Freddie Mac does not acknowledge insurance carrier ratings from KBRA, and that Demotech stated it had retracted the Frontline companies’ ratings.
Topics Carriers.