Florida-based Frontline withdraws from Demotech but sees BBB+ from KBRA

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Frontline Insurance Group, the parent company of two major property insurers in Florida, had its financial stability rating withdrawn by rating agency Demotech.

Frontline business leaders were not available Tuesday to discuss the move. But company officials who spoke about the background said the insurers voluntarily withdrew their rating requests and ended their relationship with Demotech after there was widespread dissatisfaction with Demotech’s rating process.

Lake Mary-based Frontline Insurance Unlimited Co. and its sister company First Protective Insurance Co. are now rated by KBRA, formerly the Kroll Bond Rating Agency. The company gave the airlines a BBB+ rating in December and the outlook for the companies was marked as stable, KBRA said.

While not a prime rating of financial health, a BBB+ stamp is considered acceptable by Fannie Mae and Freddie Mac, the all-important secondary mortgage buyers. If homeowners insurance companies aren’t highly rated, homeowners may have to find new coverage or be forced into more expensive policies.

Fannie Mae’s Guide to Mortgage Lenders notes that mortgagee property insurers must meet one of the four rating firm rating levels: AM Best: B or better; Demotech: A or better; KBRA: BBB or better; S&P Global: BBB or better.

Nonetheless, Demotech’s announcement this week that it was dropping its rating from Frontline set off alarm bells among insurance agents and homeowners’ associations in Florida. Rating pullback has often resulted in financial problems for Florida insurance carriers in recent years.

Concerns were compounded because Frontline Insurance Unlimited is a surplus line airline that is subject to fewer Florida insurance regulations than Florida-based airlines. In the event of bankruptcy, state regulators may have little authority to require the return of unearned premiums. And the Florida Insurance Guaranty Association is not responsible for paying excess line carriers’ outstanding claims if insurers are liquidated.

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Demotech caused a major controversy last July when it announced that up to 16 Florida airlines would soon face rating downgrades or withdrawals. Some in the insurance industry said the warning was just a reflection of the dire state of the Florida market, which has been rattled by rising litigation and reinsurance costs in recent years.

But state regulators and the Florida Association of Insurance Agents were outraged and slammed Demotech for failing to adhere to its own criteria and failing to consider other factors in the financial prospects of struggling insurance companies. State officials commissioned a study this fall to examine alternatives to Demotech, which has become the dominant rating agency for Florida-based insurers over the past 25 years.

The Florida Office of Insurance Regulation also approved a plan this summer that would allow Citizens Property Insurance Corp. allows it to act as a backstop and pay some claims for insolvent insurers if necessary. This circumvents the need for a sterling rating. Fannie Mae and Freddie Mac said in December that they had accepted the cut-through endorsement plan.

Demotech President Joe Petrelli could not be reached Tuesday for comment on Frontline Group’s ratings withdrawal.

Voluntary exits are not as uncommon as they used to be in Florida. For example, on Tuesday, KBRA announced that it had affirmed a “BBB” rating for AmeriTrust Insurance Group, giving its subsidiaries Star Insurance Co., Century Surety Co., AmeriTrust Insurance, Williamsburg National, and “A-” Century. Subsequently, these companies withdrew from the KBRA ratings.

All except ProCentury are licensed to do business in Florida. KBRA did not explain why AmeriTrust withdrew its rating request in light of favorable financial news.

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“AmeriTrust’s ratings reflect its favorable operating metrics, driven by strong excess growth and the effective use of a dual admitted/unauthorized structure,” KBRA said in a press release. “The combined ratio has improved significantly in recent years, reflecting stronger reserves, the implementation of improved underwriting initiatives and the elimination of fronting fees.”

Some Florida agents have worried that Frontline may not be in such good shape, especially after potentially heavy losses from Hurricane Ian in southwest Florida in late September. For the first six months of 2022, Frontline reported just $2 million in net income, followed by a slight loss for 2021, according to AM Best financial information released by the Florida Association of Insurance Agents.

Frontline had maintained a policyholder surplus of $30 million to $34 million for much of 2021 and 2022. The combined ratio, a measure of profitability, has steadily improved in recent months, the report said.

As recently as August 2022, Demotech had awarded Frontline the rating “A Exceptional”.

“Our strong business model and exceptional financial strength has enabled us to offer homeowners and business owners a consistently high financial stability rating®‘ Frontline CEO Leman Porter said in a statement in August. “We continue to emphasize our commitment to our customers, which this announcement only reinforces.”

And December’s KBRA announcement of Frontline’s cheap valuation suggested that frontline airlines are healthy.

“Although both companies have reported net losses in three of the last five years, primarily due to increased natural catastrophe events, KBRA is positive on near-term financial results, driven by strong underwriting and claims processing that compare favorably to other Florida companies,” KBRA said.

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The concentration of companies in hurricane-prone states have made them dependent on reinsurance, the KBRA statement said. “While favorable in terms of stated objectives, each company’s risk-based capitalization and premium leverage generally compare unfavorably to its Florida peers.”

Frontline’s website made no mention of Demotech’s rating withdrawal Tuesday. The website noted that Frontline was founded in 1998 and Frontline Insurance and First Protective write real estate in Alabama, Florida, Georgia, North Carolina and South Carolina.