The downgrade of one of Tower Hill’s insurance companies by AM Best financial rating firm, announced the day that Hurricane Ian nosed into southwest Florida, has led to new speculation that Tower Hill could be the next insurer to falter in the Sunshine State.
Tower Hill officials, whose Gainesville-based companies as recently as late 2021 held more than 5% of the Florida property market, have said for more than a year that policies from several TH companies are being rolled into Tower Hill Insurance Exchange, a type of reciprocal insurer.
But AM Best said last week that the changes do little to mask deep financial problems, including shortcomings in surplus and capital.
“We think it’s really just rearranging the furniture on the deck, so that maybe people won’t see how bad things are,” said Josie Novak, a financial analyst at AM Best.
AM Best announced Sept. 28 that it had downgraded the financial strength rating for Tower Hill Prime Insurance Co. from B+ (good) to B (fair) and said the outlook for the company is negative. Tower Hill has said Prime plans to exit the Florida market sometime in 2023, and its personal lines policies will be moved to the exchange.
“The downgrade of Tower Hill Prime’s Long-Term ICR (issuer credit rating) reflects a significant decline in its overall risk-adjusted capitalization, as measured by the best capital adequacy ratio (BCAR), to the very strong level from the strongest level, coupled with continued surplus erosion and elevated financial leverage of the holding company,” AM Best said in a statement.
The same day that AM Best announced the downgrade, Tower Hill said it no longer wished to participate and asked that its TH Prime rating be withdrawn altogether. Meanwhile, Tower Hill Prime’s stability rating by another firm, Demotech, has remained at “A exceptional,” Demotech reported.
An appointed agent for Tower Hill said the AM Best downgrade could be “devastating” for the insurer, and would mean Tower Hill Prime won’t be able write as much business it needs to. It could also mean trouble for policyholders who have mortgages, since secondary morgtage companies often require HO insurers to maintain top financial ratings.
AM Best said that the financials don’t look good. Tower Hill Prime continues to face challenges in setting adequate reserves, thanks in part to the excessive litigation plaguing most Florida property insurers. That has left the company over leveraged with loans.
It’s the second downgrade for Tower Hill Prime this year. AM Best announced in April that it had cut the rating from B++ to B+, due in part to underwriting losses in the previous five years. And in May, Tower Hill Insurance Group said it had voluntarily withdrawn its Demotech rating for Tower Hill Preferred and Tower Hill Signature companies, noting that policies were being transferred into the reciprocal exchange.
The move raised questions at the time, but Tower Hill officials assured the market that all was well.
“Especially for our agency partners, transitioning to the reciprocal insurer business model affords continued growth through increased capacity availability,” Tower Hill Group said in a statement in May. “We look forward to expanding together in 2022 and beyond.”
The reciprocal exchange structure is an efficient way to build surplus through annual surplus contributions by subscribers, a spokeswoman for Tower Hill said at the time. The exchange program should have 200,000 subscribers by the end of the year. AM Best’s Novak said an exchange program gives the company more flexibility, but is expensive to crank up. In late 2021, Tower Hill officials said that it had obtained a $200 million capital commitment from Gallatin Point Capital, Vantage Group Holdings and other investors.
Last week, Tower Hill officials did not go into detail about the group’s current financial picture, but said that Tower Hill Prime’s balance sheet was strong and that risk-based capital is well above required levels. The main driver of losses reported earlier this year was storms, the company said, but did not elaborate on which events it was referring to.
Regarding the effect of Hurricane Ian, which destroyed or damaged thousands of homes in southwest Florida, the group said that estimated losses are significantly under reinsurance limits.
“Our CAT management plan covers at least a 100,000-claim event, there have not been any significant delays with adjusters or external partners, and we are executing our plan as scheduled with resources in line,” the company statement said.
Tower Hill officials did not provide an estimate on claims. But judging by other Florida insurers’ numbers, they could be significant. Citizens Property Insurance Corp. has estimated that it will see some 225,000 claims from Ian and as much as $2.6 billion in losses. If Citizens is 13% of the market, as some estimates have said, and the Tower Hill group of insurers now holds about 4% of the market, that could mean roughly 60,000 claims and less than $1 billion in insured losses.
Tower Hill is no start-up or post-Hurricane Andrew insurer. The company said it began in 1972 as one small agency in south Florida, and is still owned by members of the same family. It has continued to evolve and the exchange should be finalized by next year.
One Tower Hill agent told Insurance Journal that the exchange move is still a question mark for many in the state. Tower Hill is “now like a totally different company,” and has been less responsive than it was before the restructuring, he said.
Rather than maintaining ratings with three firms, Tower Hill management “made the difficult decision to withdraw the AM Best rating while the exposure to Florida runs off in the company, and once completed, reconsider the rating,” Tower Hill said in its statement.
AM Best does not rate Tower Hill Exchange.
A ratings downgrade or withdrawal has often preceded restructuring or insolvency for Florida insurers. If one or more Tower Hill companies were to become insolvent, it would be seventh Florida-based insurance company this year to be placed into liquidation.
Company officials suggested that won’t happen.
“We are confident in the financial strength of Tower Hill Prime and Tower Hill Insurance Exchange and look forward to servicing our customers and members in Florida and other markets for years to come,” the company said. “Tower Hill Insurance Group has been protecting our customers for over 50 years and we are looking forward to the next 50 and more.”