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Florida homeowners’ insurance specialists are reporting continued performance deterioration and a decline in capitalization levels, despite the most severe losses from the record 2020 hurricane season occurring outside of the Florida market, Fitch Ratings said in a recent report.

According to the rating agency, underwriting losses rose sharply for a group of 28 property/casualty (P/C) insurers focused on Florida homeowners’ insurance business, accounting for 60% of direct state market share for the $10 billion of direct premiums written in the state. The specialists had an aggregate combined ratio of 131% through 9M20 versus 111% at year-end 2019.

Florida homeowners’ insurance premium rates are rising in response to these poorer underlying loss trends and past catastrophe losses. Requested base rate increases in excess of 10% were common across Florida specialist carriers’ 2020 annual rate filings.

Fitch said carriers have cited rapid growth in litigation from non-catastrophe water damage claims as a driver of higher losses, as the pace of property damage claims that result in a lawsuit in Florida remains elevated relative to the broader U.S. market. Litigated claims tend to settle at values well in excess of those without a lawsuit, from both higher indemnity payments and defense costs.

Recovery in underwriting results from rate increases have been offset by higher reinsurance costs, with Florida-focused mid-year 2020 renewals showing a second year of sizable reinsurance rate increases, in some cases as much as 30%-35%.

Florida homeowners’ insurance specialists have business profiles characterized by limited scale and concentration in a volatile product segment, with further poor segment performance potentially leading to market exits and consolidation, Fitch said. Combined with less favorable risk-adjusted capital levels, high dependence on reinsurance and the recent poor profitability trends, the large majority of these companies would be rated below ‘BBB’ by Fitch.