Southern Fidelity may wind-down after failing to secure reinsurance, losing rating

Southern Fidelity Insurance Company, the Florida focused primary insurance carrier that counts investment manager Hudson Structured Capital Management Ltd. as a key backer, appears likely to wind-down after failing to secure the reinsurance it needs and subsequently losing its Demotech rating.

Southern Fidelity received an investment from Hudson Structured, operating its insurance and reinsurance investment business as HSCM Bermuda, back in 2020 when the insurance-linked securities (ILS) asset manager took a majority stake in the company.

The company has faced challenging catastrophe and severe weather losses in recent years, resulting in negative performance and this situation has now been exacerbated by the hard reinsurance market environment in 2022.

As we explained, Southern Fidelity had been attempting to tap the catastrophe bond market in 2022, as part of its reinsurance renewal arrangements.

However, before that could be secured, Southern Fidelity filed to stop writing new or renewal business until its reinsurance arrangements could be secured for the coming wind season.

As we then reported last week, Southern Fidelity’s attempt to secure coverage in the catastrophe bond market failed, as its deal was pulled from issuance.

Now, the Florida Office of Insurance Regulation has published an order stating that Souther Fidelity was unable to place a complete catastrophe reinsurance program and that it had entered into negotiations to transfer some or all of its policies to another insurer, as part of a winding-down plan.

We understand other options are being explored, but a transition of some or all of its policies and subsequent winding-down and running-off of any remainder is now considered the most likely option.

Southern Fidelity has approximately 78,000 Florida insurance policies in force and another 69,000 across Louisiana, South Carolina and Mississippi.

The Florida insurance regulator said that it finds Southern Fidelity in “hazardous financial condition”, saying that a plan of remediation must be presented by June 8th.

This plan needs to detail the transition of policies to another insurer, how it will fund a solvent run-off and also address potential reserve inadequacies as well as how it will deal with non-Florida policies and losses.

Rating agency Demotech has now withdrawn Southern Fidelity’s ratings, saying, “After completing our review of first quarter 2022 financial statements and considering that the Company’s reinsurance coverage for the 2022 hurricane season is not complete as of June 2, 2022, Demotech has withdrawn the Financial Stability Rating previously assigned to Southern Fidelity Insurance Company.”

David Paul, Principal at ALIRT Research, explained that, “The demise of Southern Fidelity Insurance Company (SFIC) as an active insurer reminds us – if reminder is needed – that the Florida homeowner’s market is far from out of the woods following the recent special legislative session to address cost drivers.

“As shown in ALIRT’s work, SFIC was already on the ropes with scores in the 20’s to high teens the last three full years. As we’ve explained in the past, insurers scoring in the low 30’s or below almost always face remedial actions including, in more extreme cases, regulatory intervention.”

Southern Fidelity is not an outlier though and its demise may herald trouble for others, as ALIRT scores numerous Florida insurers relatively poorly, suggesting a troubled financial status.

Commenting on the future for Florida’s insurance marketplace, Paul said, “We have held our tongues re: the recent legislation out of Florida (Senate Bill 2B). Governor DeSantis stated that the bill “represents the most significant reforms to Florida’s homeowners insurance market in a generation” and we concede that it was a step in the right direction. The question remains whether it was a bold enough to stem the massive losses accruing to Florida homeowners insurers.

“The fact that reinsurers are holding back from providing the capacity needed at 2022 mid-year renewals – as was the case with SFIC – seems to indicate no, at least for the time being.”

Southern Fidelity is an example of a company that was already challenged and then the current reinsurance market conditions made its survival untenable, it seems.

A winding-down is far preferable to a failure, of course, as it means continuity for policyholders and an orderly transfer of most policies and running-off of the rest.

Others may follow, it appears a matter of time until more Florida focused property insurance players are challenged.

Read our coverage of Florida’s property insurance crisis below:

Florida carriers reliant on reinsurance face “existential challenge” – AM Best.

ILS market no longer a “safety valve” for Florida’s reinsurance needs: Stonybrook.

Florida reinsurance renewals to see at least 20-30% rate rise: Analysts.

Florida property insurance legislation “inadequate”, says Demotech’s Petrelli.

Florida insurance reforms signed into law, uncertainty to persist.

Reforms won’t have immediate positive impact on reinsurance in Florida: Survey.

Florida property reforms pass House, but reinsurers to remain sceptical.

Florida insurance reforms pass Senate, but may not save all carriers.

Florida’s insurance carriers over-litigated, not under-capitalized: Demotech’s Petrelli.

Florida insurance bills pass first hurdle. But details to matter.

Florida: Some carriers are on life support, others about to pull the plug.

Florida’s special session property insurance reforms: Opportunity lost?

Florida Citizens CFO says risk transfer markets in “disarray”.

“Really significant” property insurance reforms for Florida: DeSantis.

Florida “flash point” as reinsurance market begins to throw in the towel: ALIRT.

FedNat details Florida downsizing plan, says Monarch to be acquired.

Florida Special Session to focus on fraud, AOB abuse & affordability: CFO Patronis.

More insurers seeking rate hikes of 23% to 49% in Florida.

Cat Fund reform is crumbs, Floridians need a feast: Demotech’s Petrelli.

Florida litigated claims rise again, but “hope” in Special Session: CaseGlide.

Florida – “The theatre is on fire,” FHCF change won’t solve it: RenRe CEO.

Swiss Re not optimistic on Florida reinsurance pricing: CFO Dacey.

To ensure progress in Florida reinsurers could pull capacity: Assured Research.

Full placement of Florida reinsurance programs to be challenging: AM Best.

Florida Governor sets property insurance special session for end of May.

“Cause for concern” as AOB & litigated claims rise in Florida: CaseGlide CEO.

Ida insolvencies continue, as Florida runs out of road: ALIRT.

Florida property insurance market “in collapse”, special session uncertain.

Florida renewal “one of the toughest in recent memory” – JMP Securities.

Demotech calls for Florida market reform with rating downgrades likely.

No quick fix as Florida property insurance reforms fail to pass.

Another one bites the dust – Florida’s insurance failures continue.

Assignment of benefit (AOB) claims rising for Florida P&C insurers.