Another Sunshine State insurer falls: Southern Fidelity enters receivership

Southern Fidelity, which has 78,000 policies in Florida, had failed to secure reinsurance for the 2022 hurricane season.

The company had filed a plan on June 8, 2022, that outlined how it could transition policies to another insurer, fund a solvent run-off of current and incurred (but not reported) liabilities, address potential reserve inadequacy issues and manage its policies and losses outside of Florida. The state’s insurance office rejected it. (Credit: Fitz/Adobe Stock)

Southern Fidelity Insurance Company has entered into receivership and is being liquidated, according to the Florida Office of Insurance Regulations (FLOIR).

The state’s insurance office made the move on the basis that the insurer was impaired, insolvent or likely to become insolvent and that further transactions would be potentially hazardous to policyholders, creditors, stockholders or the public.

On June 3, 2022, Demotech, Inc. reported it had withdrawn its financial stability rating for Southern Fidelity, as the insurer had failed to secure reinsurance for the 2022 hurricane season prior to June 2. The company’s reinsurance expired on May 31, 2022, according to FLOIR. Southern Fidelity notified its agents on May 26 that it was suspending new business and renewals until reinsurance could be secured.

The company had filed a plan on June 8 that outlined how it could transition policies to another insurer, fund a solvent run-off of current and incurred (but not reported) liabilities, address potential reserve inadequacy issues and manage its policies and losses outside of Florida. The state’s insurance office rejected that plan, noting it didn’t meet requirements of the consent order, which mandated, among other provisions, financial protections for policyholders during the period of time it would take to implement the plan.

This news comes less than a month after Florida enacted insurance reforms in hopes of stabilizing the turbulent market. However, AM Best reported the changes do not address the immediate crisis in the state.

Among its provision, the new law built a $2 billion reinsurance relief program, dubbed the Reinsurance to Assist Policyholders (RAP) program. The initiative offers reinsurance coverage with no up-front costs to insurers in exchange for lower future premiums.

However, the program is only available in the case of a hurricane and doesn’t cover secondary perils or less severe storms, which have been problematic in Florida, according to AM Best.

“Because of the significant losses in Florida in recent years, reinsurers have been evaluating their own aggregate exposures and capital allocation targets,” AM Best stated in a report. “As a result, primary insurers whose leverage ratios are already high will find their financial strength in jeopardy if they are unable to place the reinsurance on which they rely. Whether many of these carriers, especially those not rated by AM Best, have sufficiently filled out their catastrophe programs, is difficult to ascertain.”

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