Rehab Plan Didn’t Suffice. Southern Fidelity Sinks into Insolvency

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Two weeks after it lost its financial stability rating, Southern Fidelity Insurance Co. has been ordered into receivership and is being liquidated, making it the fourth Florida property insurer this year to bite the dust.

A Leon County Circuit Court judge on Wednesday ordered the state Department of Financial Services to act as the receiver for the carrier, which was unable to complete its reinsurance program ahead of hurricane season.

The petition from DFS quotes from an affidavit submitted by Virginia Christy, director of financial oversight for Southern Fidelity, noting that the firm’s “catastrophe reinsurance program expired on May 31, 2022 and respondent ‘currently has no catastrophe reinsurance to cover its existing policyholders during the 2022-2023 Atlantic hurricane season.’”

Some in the industry had expressed hope that the company, which reported 98,000 policies in force at the end of 2021, may be able to avoid insolvency with some type of rehabilitation plan submitted to the Office of Insurance Regulation – especially after rate increases of 84% and 111% early this year and the infusion of $200 million in capital.

But the company’s June 8 rehab plan did not satisfy regulators or provide enough protection to policyholders, the consent order petition reads.

Christy’s affidavit explains that trouble had been brewing for several years. She listed the many steps company has been through:

  • In February 2019, Southern Fidelity merged with Capitol Preferred Insurance Co. (CPIC) and Southern’s underwriting losses became Capitol’s. For the next year, both companies continued to post poor operating results, according to Christy’s statement.
  • CPIC then failed to make rate filings with OIR. In February 2020, the office asked the companies to file monthly financial statements and estimates of capital needed.
  • In May 2020, Capitol Preferred asked to be allowed to drop 23,800 of Southern Fidelity’s policies. Three months later, CPIC and Southern asked for substantial rate increases. Company officials also tried merging Capitol Preferred back into Southern Fidelity. OIR approved the plan in September.
  • That same month, Southern reported a surplus just above the minimum required, “indicating that the company was at risk of impairment or insolvency if an immediate capital infusion was not made.” In October 2020, OIR placed Southern under “confidential administrative supervision.”
  • A month later, Southern was acquired by Gulf & Atlantic Insurance Co., which was owned by Hudson Structured Capital Management. Southern said it planned to cancel or non-renew some 40,000 policies within four months.
  • In late 2021 and early 2022, Southern Fidelity gave notice of a rate increase of 84% for homeowners policies and 111% for dwelling fire policies. By then, Hudson Structured Capital had provided $200 million in capital infusions to the company.
  • In May of this year, Southern Fidelity suspended new business in Florida. In early June, the Demotech rating firm withdrew the company’s financial rating.

The consent order petition notes that SFIC’s condition was critical in April, when it reported just a $26 million surplus.

The order did not explain if the Florida Insurance Guaranty Association will now be forced to raise the surcharge on other carriers to cover outstanding claims.

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