Florida insurer failures buck a downward industry trend
When faced with an existential threat, sometimes you must do whatever it takes. Last week, Kevin McCarthy persevered against what looked like a Sisyphean struggle. He kept chipping at it and eventually succeeded in securing The House speakership role after fifteen rounds of voting.
Not all struggles have a positive outcome. As we watched the repeated attempts to corral the necessary votes to secure the spot, we wondered how insurance companies have fared in their struggles.
These outcomes have added relevance when evaluating the Fed’s actions over the past year or so. Are the insurance mini-cycles playing out differently vs. the broader economy? Have insurance companies gotten better at evaluating risk/reward over time?
When insurance companies run into major trouble, there are three steps in the receivership cycle – conservation, rehabilitation, or liquidation (not always necessarily in that order).
Generally, the receivership cycle of an insurance company starts with conservation, where a regulator of a domiciled state attempts to safeguard the company’s assets and determine the next possible steps to protect policyholders.
Further, the company is placed into rehabilitation, where the regulator attempts to resolve an insurer’s financial health by protecting its assets, running off its liabilities, or preparing for the insurer for liquidation.
Ultimately, the state regulator could petition the court for a final liquidation order. In liquidation, the appointed receiver/liquidator distributes the assets to stakeholders and dissolves the insurer.
Sometimes, a company is directly placed into rehabilitation or liquidated based on circumstances, varying from case to case.
This note will share the receivership activity of the US P&C industry for the past 25 years, focusing on specific names over the past six years.
Firstly, receivership is trending down historically
The Inside P&C Research team analyzed receivership activity since 1997 and found a downward trend overall through 2022. During each of three years between 2019 and 2021, 12 companies were placed into receivership by state regulators; that number lessened to nine for 2022.
Digging deeper into trends, a significant number of companies were placed into receivership post-2008 and slowed down a tad before spiking after the Covid-19 pandemic.
The P&C industry saw increased loss costs and escalated catastrophe activity largely due to Hurricane Ian in 2022. This has squeezed margins for the overall industry and put even more pressure on Florida insurers.
The graph below shows receivership trends for the past 25 years.
Although there seem to be spikes that lag global financial crises (2001, 2008, 2020), the overall trend is down. Also included in the graph are industry combined ratios. Directionally, we see some correlation between combined ratios and receivership frequency.
However, focusing in on the past six years, we see that the number of receiverships has spiked.
The following tables share the names of the companies that have gone into receivership, with bolded names indicating they are in the rehabilitation stage.
Note: The above analysis represents a best-effort compilation of only US-domiciled P&C statutory entities’ (not groups) receiverships using the NAIC Global Receivership Information Database. The companies are categorized under receivership if it’s placed in rehabilitation or liquidated in the given year. If the company is placed under rehabilitation and liquidated in subsequent years, then the liquidation year is taken into consideration.
We see clearly that liquidation is the most common result when a company is placed into receivership.
Secondly, Florida is bucking the overall P&C receivership trend
One of the characterizing themes of 2022 was the collapse of Florida-domiciled insurers. Florida continues to see an uptick in the volume of receivership activity, with five companies liquidated in 2022, two in 2021 and one company in 2020.
The following graph shows the number of receiverships for Florida-admitted writers from 2001 to 2022.
We see above that the Florida receivership trends contrast with overall US P&C trends.
Florida’s market faces significant problems, particularly in the homeowners' segment, due to hurricanes, potential fraud, and increased litigation costs. Additionally, the lack of reinsurance support adds to the instability in Florida.
More pressure has been placed on Citizens and the Florida Insurance Guaranty Association, and with limited funds available, premiums paid by insureds are multiples higher than their previous rates.
Thirdly, 2022 saw nine companies in receivership
As indicated above, the story of 2022 is dominated by receivership activity in Florida. The following chart displays the nine insurers who went into receivership in 2022.
Mostly companies get pushed into receivership because of shocks caused by catastrophes or excessive litigation. However, mismanagement of capital, inadequate reinsurance protection, and undisciplined underwriting are usually what separate two companies undergoing the same catastrophic shocks.
An important realization is that all of these insurers have exposure to Florida. The two Louisiana-domiciled entities of Lighthouse and Americas Insurance largely went into receivership because of their Florida exposure.
Included in the chart above are the latest capital and surplus levels for each of these companies. We thought it would be interesting to look at these capital and surplus levels in other relevant insurers to see if they could potentially serve as a predictor for receiverships.
The following table shows existing Florida insurers which exhibit a mix of capital health.
We are watching Florida closely, especially the names showing a downward trend in capital and surplus.
Whether 2023 will be lighter in receiverships remains to be seen, but the ongoing problems in the Florida homeowners’ market do not bode well for incoming receiverships.
In summary, nationwide regulation has kept the lid on rampant receiverships, as the frequency of these events has trended down over the past 20 years. The particular challenges in Florida separate the state from the rest of the country, and even though legislation is changing, there is much uncertainty surrounding its property insurance market.