A.M. Best Downgrades Tower Hill
Aug 27, 2009
After an A.M. Best downgrade of three Tower Hill insurance companies this week as the result of the insurer’s inadequate purchase of reinsurance to meet A.M. Best’s 1-in-100 year standards, Tower Hill asked to be withdrawn from A.M.Best’s interactive rating process as well.
The related A.M. Best press release and further in-depth coverage of the story by The News Service of Florida is reprinted below.
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A.M. Best Downgrades and Withdraws Ratings of Various Tower Hill Companies
OLDWICK, N.J., AUGUST 26, 2009–A.M. Best Co. has downgraded the financial strength ratings (FSR) to D (Poor) from B (Fair) and issuer credit ratings (ICR) to “c” from “bb” of Tower Hill Preferred Insurance Company, Tower Hill Prime Insurance Company and Omega Insurance Company (known collectively as Tower Hill). The outlook for these ratings is negative. All companies are domiciled in Gainesville, FL
Subsequently, A.M. Best has withdrawn the ratings and assigned a category NR-4 (Company Request) to the FSRs and an “nr” to the ICRs in response to Tower Hill’s management’s request to be removed from A.M. Best’s interactive rating process.
These rating actions consider the companies’ exposure as Florida personal property writers to frequent and severe catastrophic weather events, which is significant on both a gross and net basis, in relation to their surplus positions. However, the entities current catastrophe programs rely less on the Florida Hurricane Catastrophe Fund (FHCF), as no reinsurance was purchased from the FHCF’s Temporary Increase In Coverage Limits (TICL) layer, as the entities remained skeptical on the ability of the FHCF to fund all obligations associated with a severe hurricane event. In addition, as the companies recently eliminated their quota share programs, combined with modest catastrophe reinsurance coverage in potential multiple event scenarios, A.M. Best views their risk-adjusted capital positions as poor, particularly as measured on a catastrophe stress test basis. The uncertainties inherent in the companies’ risk-adjusted capital positions and overall catastrophe reinsurance programs are reflected by the negative outlook.
Partially offsetting these negative rating factors are the companies’ efforts in improving their underwriting standards and geographic spread in Florida, as well as the historical financial support from their parent companies and management’s long standing presence in the Florida property insurance market.
TOWER HILL DOWNGRADED, DISPUTES RATING CRITERIA
By DAVID ROYSE
THE NEWS SERVICE OF FLORIDA
THE CAPITAL, TALLAHASSEE, Aug. 27, 2009…..Gainesville-based Tower Hill Insurance Group’s lack of confidence in the optional layer of the Florida Hurricane Catastrophe Fund has led to a ratings dust up, with major rating company A.M. Best downgrading the group’s companies and the insurer in turn asking to drop out of the ratings company’s portfolio.
A.M. Best on Wednesday said it downgraded the financial strength rating of three Tower Hill companies, Tower Hill Preferred Insurance, Tower Hill Prime Insurance and Omega Insurance, lowering their ratings from B, or fair, to D, or poor, citing the companies’ hurricane exposure and concern about whether they had enough back up capital to deal with a major hurricane.
The ratings company requires insurers to have reinsurance that would allow them to pay claims from two 100-year hurricanes in the same season.
Tower Hill acknowledged that in not buying coverage in the optional layer of the Florida Hurricane Catastrophe Fund – known as the TICL – and instead relying on the mandatory CAT Fund coverage and private reinsurance, it doesn’t have enough backup to meet A.M. Best’s threshold. But it’s not needed, the company said.
“The probability of such a series of events is one in 10,000, or a .01% probability of occurrence,” the company said in a statement released Thursday after it was downgraded. “There has not been such an event in recorded history.”
Tower Hill didn’t purchase reinsurance in the optional layer of the Catastrophe Fund this year because it said it wasn’t confident in the CAT Fund’s ability to make good on its obligations. The company argued that its decision made its policyholders more secure.
“Entering the 2009 hurricane season, the Florida Hurricane Catastrophe Fund had a potential liability of $27.5 billion and subsequently acknowledged in May that their current maximum reimbursement capability for the 2009 hurricane season is $15.8 billion,” Tower Hill said. “After careful consideration, Tower Hill made the difficult decision to not purchase any of the voluntary, and currently unfunded, reinsurance coverage offered by the FHCF and instead replaced this coverage with reinsurance from the more dependable, albeit more expensive, private reinsurance market. The net impact of this decision is that Tower Hill and its policyholders are now more secure than ever in the event of a catastrophic loss.”
But A.M. Best said “uncertainties inherent in the companies’ risk-adjusted capital positions and overall catastrophe reinsurance programs are reflected by the negative outlook.”
Tower Hill argued that it has plenty of reinsurance, $850 million.
“This reinsurance coverage affords Tower Hill not only enough protection to survive a hurricane more devastating than a 140-year hurricane in a first event (the Florida OIR minimum requirement is a 100-year hurricane), but also a 60-year hurricane in a subsequent second event,” the company said. “All of the Florida land-falling hurricanes since 1992, including Andrew, Charlie, Frances, Ivan, Jeanne, Katrina, Rita and Wilma, have been far less damaging than a projected 60-year hurricane.”
Critics say the Tower Hill experience points out a major – and ironic – problem. While a ratings company like A.M. Best requires a large amount of reinsurance that could only likely be afforded by using cheaper state-backed underwriting, the ratings agency doesn’t really give the company any credit for having optional CAT fund coverage, because the fund doesn’t have enough money.
“This whole thing just points out the silly distortions that our state government has created,” said Jeff Grady, CEO of the Florida Association of Insurance Agents. Rating agencies, Grady said, essentially make the companies buy optional CAT fund coverage and then say, “‘Now show us your real reinsurance.'”
The state acknowledges that the optional layer of the CAT fund is short, “yet they charge for it,” Grady said. “It’s almost extortion.”
CAT Fund Director Jack Nicholson said Thursday that several companies didn’t select the optional coverage this year because of the current state of the bond markets.
“Given the circumstances and economic conditions, it is easy to understand why companies would not purchase (optional state CAT Fund) TICL coverage,” Nicholson said in an E-mail to the News Service. “That is not a reflection on the FHCF, but an understanding of the current financial markets.”
Grady pointed out that the practical effect of Tower Hill dropping out of the A.M. Best rating system is effectively nothing – several other Florida insurers aren’t rated by Best.
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8/27/2009
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