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FedNat to exit non-Florida states after $24mn Q3 loss

FedNat Insurance logo Fort Lauderdale Florida.jpg

FedNat fell to a $24.8mn net loss for Q3, worse than last year's $20.7mn loss, despite a lower catastrophe loss burden, as it announced it was exiting non-Florida business.

The steeper loss reflected lower levels of premium income outweighing the decline in claims, as the struggling carrier has been cutting back business and relying more heavily on quota share reinsurance.

Gulf scaleback: The carrier will put its Maison Insurance subsidiary business into run-off, and will let Louisiana, Texas and Florida policies written through this brand lapse from January to June next year.

Non-Florida business written on FedNat paper was written through MGU SafeSure, which will begin transferring its Louisiana and Texas client base onto other carriers from December. However, FedNat will renew SageSure policies in South Carolina, Alabama and Mississippi until other carrier partners of the MGU have paper to write in those states.

Premium: FedNat's top-line premium shrank by 13% to $180.2mn, as it has been cutting back exposures. Ceded premiums rose almost a quarter to $124.4mn, largely driven by new quota shares taken out by the carrier throughout the year.

Underwriting: The Q3 combined ratio deteriorated to 165.4%, up by 11 points year-on-year, despite catastrophe losses having a lesser impact. Net cat losses of $20.3mn contributed just under 38 points to this quarter's ratio, from 46 points and $38.3mn a year earlier amidst a more active hurricane season.

The company did not provide any disclosure on the scale of gross Ida losses, which it anticipated would trigger XOL reinsurance recoveries.

Its attritional loss ratio improved to 34%, from 38.3% in Q3 2020.

Commentary: CEO Michael Braun said the expansion outside Florida, that the firm began in 2013 and accelerated in 2019 via its Maison acquisition, was "well-intended" given the challenges in the Florida homeowners market at that time.

But high cat activity in Texas and Louisiana over the past 15 months, coupled with the hardening reinsurance market, meant FedNat’s capital position became strained, Braun said.

"We believe now is the right time to focus on writing policies in Florida, where FedNat continues to have significant market share, strong underwriting and claims handling capabilities, and strong agent relationships.”

He noted the firm had lifted rates by 50%-70% in its FedNat and Monarch portfolio in the past four years.

Braun added that the Gulf run-off process was expected to take approximately 18 months to complete, leaving FedNat with $450mn of anticipated in-force premium exclusively in Florida.

"We expect the benefits of this transition to begin to materialize immediately in the form of lower capital requirements and lower exposure to catastrophe weather losses."

The company noted it had put $20mn of capital into FedNat Insurance Company at the end of the quarter to support its balance sheet.

The carrier had engaged Piper Sandler & Co as a financial adviser to work on its options as part of a review over the past year.

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