Florida's Tower Hill Insurance Downgraded by A.M. Best; Tower Hill Responds

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 Co., Tower Hill Prime Insurance Co. and Omega Insurance Co. -- companies known collectively as Tower Hill.

The ratings agency said the outlook for these ratings is negative.

All companies are domiciled in Gainesville, Florida.

Tower Hill responded to the downgrades, defending its decision to buy private reinsurance rather than rely on the state-backed hurricane fund, a decision it said is the reason for the downgrades.

A.M. Best said it has has also withdrawn the ratings and assigned a category NR-4 (Company Request) to the FSRs and an "nr" to the ICRs in response to Tower Hill's management's request to be removed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.

A.M. Best said its rating actions consider the companies' exposure as Florida personal property writers to frequent and severe catastrophic weather events, which A.M. Best said 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 said it 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, A.M. Best said.

Partially offsetting these negative rating factors in A.M. Best analysts' view 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 Insurance Group issued a statement saying it is "disappointed" in the donwgrades but expected them after its recent reinsurance transactions. Tower Hill decided not to purchase any of the voluntary reinsurance coverage offered by the FHCF and instead replaced this with reinsurance from the private 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," the company said.

Tower Hill said that Florida's homeowners insurance market has undergone significant chage in the last five years and "standards imposed by international rating firms on Florida-only insurance carriers have increased considerably."

The company defended its reinsurance decision:

"Tower Hill policyholders can be assured their hurricane claims will be paid in a timely manner and will not have to wait for a bailout, if any, from the federal government before their claim is paid. This decision also reduces the potential assessment impact to all Floridians in a post -hurricane environment.

"An unfortunate by-product of our decision is that Tower Hill did not meet the heightened A.M. Best threshold that requires insurers to purchase reinsurance... to be able to survive what they term as two 100-year hurricanes during the same hurricane season. The probability of such a series of events is one in 10,000, or a .01% probability of occurrence. There has not been such an event in recorded history."

For the 2009 hurricane season Tower Hill said it purchased $850 million of reinsurance coverage, which it says is enough not only to survive a hurricane more devastating than a 140-year hurricane in a first event but also a 60-year hurricane in a subsequent second event.

All Tower Hill homeowners companies hold a Demotech, Inc. financial stability (FSR) of 'A' Exceptional.

Founded in 1972 by W. T. Shively, Tower Hill offers homeowners, mobile homeowners, dwelling fire, condominium, renters, and flood coverage.

Through its commercial lines department, Tower Hill also provides property, liability, and other miscellaneous commercial coverages for the operations of mobile home parks, mobile home dealers, self-storage facilities, office/retail buildings, residential homeowner associations, and other commercially-owned residential properties.