Fednat Insurance Co., a Florida-based insurer with a modest presence in Louisiana, has been steered into insolvency by regulators after struggling to pay existing claims. It’s the ninth company with policies in Louisiana to go under since a flurry of storms hit the state starting in the summer of 2020.
Fednat had filed a notice to withdraw from Louisiana in May, a move that allowed it to cancel its existing 13,500 policies in the state, records show. At the time, the insurer said it had enough money to pay off existing claims and related expenses.
Earlier this month, however, the company told Florida regulators that it had “overstated” its financial position and no longer had sufficient cash to pay its debts and other obligations, court records show.
The admission came after a merger last month with Louisiana’s Maison Insurance Co., which was already owned by the same parent company. Fednat was the surviving insurer.
The Florida Office of Insurance Regulation moved to shutter the company on Sept. 23, asking a judge to allow the state to take it over. The move would send any outstanding claims to the industry bailout programs in each state where the insurer operated, including Louisiana.
“I expect very few premium refunds, as those should have been paid by now, but there could be some check reissues” for people who paid their premium early, said John Wells, executive director of the Louisiana Insurance Guaranty Association, the state’s bailout program for insurers. “As for claims, we have been told they have about 1,500 open Louisiana claims.”
The company’s managers cited heightened losses related to storms in 2020 and 2021 that had sunk its financial stability rating below, “A,” or exceptional.
As a result, reinsurers were unlikely to provide the company catastrophe coverage needed to operate in hurricane-prone areas of the southeastern U.S., the insurer said in the letter submitted to the Louisiana Department of Insurance.
In a petition filed in state court, Florida regulators said Fednat’s financial issues date back to March 2020, when its annual financial statement showed a “significant drop” in net income and reserves. The company, which also has policyholders in Texas, was then required to submit monthly reports.
Hurricane Laura struck the Lake Charles area in August 2020, and by October of that year, the company was holding conference calls with state regulators every two weeks as its financial condition worsened.
“Despite capital infusions, (Fednat’s) surplus continued to decline, and its underwriting losses continued to increase throughout 2020 and into and throughout 2021,” according to the state’s affidavit.
The four hurricanes to make landfall in Louisiana since mid-2020 have plunged the state’s homeowners insurance market into a crisis. Property insurers have paid out $18.4 billion in claims as of June 30, according to Louisiana Department of Insurance data. About $11 billion of that was paid to homeowners, the data shows.
Amid the tidal wave of claims, nine insurance companies have failed in the last year. Five of the firms left behind some 26,000 claims for the state’s bailout program to close out, pushing the burden onto the Louisiana Insurance Guaranty Association.
A state-chartered entity, LIGA is supported by fees assessed to insurers that write business in the state. It is planning to borrow $600 million by issuing bonds to pay off the losses from the companies that have gone under and to replenish its reserves. This will mark the first time in three decades the association has had to take such a step.
Meanwhile, at least 11 companies have submitted withdrawal notices with the Department of Insurance in the last two years, meaning they’re leaving the state. Some have cited the recent storms as their reason. The companies that have opted to stay have slowed or stopped writing new policies, especially south of Interstate 10.
The combined effects of the marketplace shakeup are shifting more people to the state’s insurer of last resort, the Louisiana Citizens Property Insurance Corp. As of June, some 39,400 policyholders were added to the state’s insurance rolls — a 109% increase from before Hurricane Laura struck.
Citizens, which by law sets its prices 10% above market rates, now has more than 100,000 customers. Insurance Commissioner Jim Donelon has said he wants to offer cash incentives for private insurers to take over those policies, a strategy Louisiana also employed after Hurricane Katrina.
The latest insolvency will likely shift more homeowners to Citizens, although it's unclear how many.
Maison had been allowed to slowly unwind its business by not renewing policies since June — a process regulators call “solvent runoff.” It gave the company a chance to avoid a sudden collapse.
Donelon said in a prepared statement that he’s still working to get “a clearer understanding of this development from a Louisiana point of view.”
“My preliminary understanding is that it will have no effect on any Louisiana policyholder,” Donelon said, “but (it) may have LIGA implications relative to claims pending at the time of Florida’s action.”
