The downgrade of one of Tower Hill’s insurers by financial ratings firm AM Best, announced on the day Hurricane Ian slammed into southwest Florida, has fueled fresh speculation that Tower Hill could be the next insurer to hit the Sunshine State falters.
Tower Hill officials, whose Gainesville-based companies held more than 5% of the Florida real estate market as of late 2021, have been saying for more than a year that policies from multiple TH companies are entering the Tower Hill Insurance Exchange, a type of mutual insurer .
But AM Best said last week the changes do little to mask deep financial problems, including shortfalls in surplus and capital.
“We think it’s really just a matter of rearranging the furniture on the deck so maybe people don’t see how bad things are,” said Josie Novak, financial analyst at AM Best.
AM Best announced on September 28 that it had downgraded Tower Hill Prime Insurance Co.’s financial strength rating to B (fair) from B+ (good) and said the outlook for the company is negative. Tower Hill has said Prime plans to exit the Florida market sometime in 2023 and its personal line policies will be moved to the exchange.
Tower Hill Select Insurance Company. Consent Order 
“Tower Hill Prime’s long-term issuer credit rating (ICR) downgrade reflects a significant decline in its total risk-adjusted capitalization, as measured by the best capital adequacy ratio (BCAR), from strong to very strong. coupled with continued excess erosion and increased holding company financial leverage,” AM Best said in a statement.
On the same day that AM Best announced the downgrade, Tower Hill said it no longer wished to participate and asked that its TH Prime rating be withdrawn altogether. Meanwhile, Tower Hill Prime’s stability rating has remained at “A exceptional” by another firm, Demotech, Demotech reported.
A Tower Hill appointed representative said AM Best’s downgrade could be “devastating” for the insurer and would mean Tower Hill Prime will not be able to write as much business as it needs to. It could also pose problems for policyholders who have mortgages, as secondary mortgage companies often require HO insurers to maintain top financial ratings.
AM Best said finances are not looking good. Tower Hill Prime continues to face challenges in establishing adequate reserves, thanks in part to the excessive litigation that plagues most Florida property insurers. As a result, the company is over-indebted with loans.
It’s the second downgrade for Tower Hill Prime this year. AM Best announced in April that it had downgraded its rating from B++ to B+, in part due to underwriting losses over the past five years. And in May, Tower Hill Insurance Group announced that it had voluntarily withdrawn its Demotech rating for Tower Hill Preferred and Tower Hill Signature companies, noting that policies were being transitioned to the reciprocal exchange.
The move raised questions at the time, but Tower Hill officials reassured the market that all was well.
“For our agency partners in particular, the transition to the mutual business model offers continued growth through increased capacity availability,” Tower Hill Group said in a statement in May. “We look forward to expanding together in 2022 and beyond.”
The two-way exchange structure is an efficient way to build up a surplus through annual surplus contributions from subscribers, a Tower Hill spokeswoman said at the time. By the end of the year, the exchange program should have 200,000 subscribers. AM Best’s Novak said an exchange program gives the company more flexibility but is expensive to boost. In late 2021, Tower Hill officials said they received a $200 million capital commitment from Gallatin Point Capital, Vantage Group Holdings and other investors.
Last week, Tower Hill officials didn’t go into detail about the group’s current financial picture, but said Tower Hill Prime’s balance sheet is strong and that risk-based capital is well above required levels. The main cause of the losses reported earlier this year were storms, the company said, but didn’t elaborate on which events it was referring to.
Regarding the impact of Hurricane Ian, which destroyed or damaged thousands of homes in Southwest Florida, the group said estimated losses are well below reinsurance limits.
“Our CAT management plan covers at least one 100,000 claim event, there have been no significant delays from experts or external partners, and we are executing our plan as planned with resources aligned,” the company’s statement said.
Tower Hill officials did not provide an estimate of the claims. But judging by the numbers from other Florida insurers, they could be significant. Citizens Property Insurance Corp. has estimated Ian will file around 225,000 claims and up to $2.6 billion in losses. If Citizens accounts for 13% of the market, as some estimates have suggested, and the Tower Hill insurance group now holds about 4% of the market, that could mean about 60,000 claims and less than $1 billion in insured losses.
Tower Hill is not a start-up or post-Hurricane Andrew insurer. The company said it started as a small agency in South Florida in 1972 and is still owned by members of the same family. It has been continuously evolving and the exchange should be complete by next year.
A Tower Hill agent told the Insurance Journal that the exchange is still a question mark for many in the state. Tower Hill is “like a completely different company now” and less responsive than before the restructuring, he said.
Rather than maintaining the three company ratings, Tower Hill’s management made “the difficult decision to withdraw the AM Best rating while the company’s Florida exposure is maturing and to reconsider the rating upon completion,” Tower Hill said in its statement .
AM Best does not rate Tower Hill Exchange.
A downgrade or withdrawal of ratings has often preceded a restructuring or bankruptcy for insurers in Florida. Should one or more Tower Hill companies file for bankruptcy, it would be the seventh Florida-based insurance company to go into liquidation this year.
Company officials suggested that this will not happen.
“We believe in the financial strength of Tower Hill Prime and Tower Hill Insurance Exchange and look forward to serving our clients and members in Florida and other markets for years to come,” the company said. “Tower Hill Insurance Group has been protecting our customers for over 50 years and we look forward to the next 50+.”
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