Demotech notifies 17 property insurance companies of rating downgrades

Posted at 7:07 PM, Jul 21, 2022

Florida's insurance rating agency Demotech has informed approximately 17 property insurance companies that their ratings will be downgraded upon review of 2022 hurricane season reinsurance packets, according to a letter from the Florida Office of Insurance Regulation (OIR).

OIR Commissioner David Altmaier sent a letter to Demotech President Joe Petrelli on Thursday sternly requesting that the agency "perform a more comprehensive review" of rating downgrades. According to the letter, about 17 domestic insurance companies informed OIR that Demotech sent them letters advising that their ratings will be downgraded from an “A” meaning "Exceptional to an “S” meaning "Substantial" or "M" meaning "Moderate."

These ratings are Financial Stability Ratings (FSR) that not only allow companies to operate in the state, but also, many Florida agents can only market and write policies for agencies with "A" ratings, according to the Insurance Information Institute. They also determine what kinds of loans homeowners can get.

When a company receives a "NR" or no rating, they are at high risk of entering receivership with the state, which could either result in rehabilitation or insolvency.

In a May interview with the Insurance Information Institute regarding FedNat's rating downgrade, spokesperson Mark Friedlander explained why it hurts a company.

RELATED: 40+ companies file homeowners insurance rate decreases in order to use Florida's reinsurance assistance funds

"That stops them from insuring homes that have federal mortgages and in some cases, it will stop independent agents from representing them. They will no longer be able to market their products to their customers because typically independent agents will only represent A rated companies. So in other words, it's basically freezing their business. That's not a model that is sustainable," Friedlander explained.

Altmaier wrote:

"As such, we have endeavored to ensure that Demotech is able to derive its ratings based upon the consistent and objective application of its own standards. However, as OIR learns more about the notice letters sent to companies, and considering the impact these actions would have on millions of Floridians, countless jobs, and Florida businesses, this type of unilateral action warrants further scrutiny. OIR is compelled to take the extraordinary step of scrutinizing these unprecedented actions to protect the Floridians we serve, especially two months into hurricane season. This is an example of inconsistent, monopolistic power of a select rating agency and is trying to exert coercive influence over Floridians and policymakers in an effort to thwart public policy according to its own opinions."

Altmaier claims there are discrepancies in the agency's rating operations is requesting that the agency account for them as well as allow companies to appeal its decision, "as allowed for in Demotech’s posted methodology."

Commissioner Altimaier is also asking Demotech to provide companies a path for review or appeal of these ratings.

We reached out to Demotech representatives for a response on Thursday evening. We have not yet heard back.

In a statement from the Insurance Information Institute Thursday evening, Friedlander said:

“The marketplace reaction to the legislative special session has been very negative as seven insurers placed a moratorium on writing new business in Florida since late May and the global reinsurance market also reacted very negatively, criticizing the legislature for not taking strong enough actions to stop the contractor schemes and excessive litigation being filed against Florida insurers.”

In addition to Altmaier’s letter, Florida’s Chief Financial Officer Jimmy Patronis also wrote letters to the Federal Housing Finance Agency, Freddie Mac and Fannie Mae leadership expressing concerns with their reliance on Demotech’s ratings.

Freddie and Fannie are federally backed home mortgage companies created by the United States Congress. They require mortgages to be insured and they must also have a specific rating. Since Demotech is the only rating agency permitted in Florida, Freddie and Fannie require the insurance company to have an rating of “A” or better from Demotech.

In his letter, Patronis calls Demotech a “rogue ratings agency” and advices the loan servicers to reconsider their reliance on the agency.

The Florida Association of Insurance Agents President Kyle Ulrich also responded to Demotech's rating downgrades in a blog on their website.

In it, Ulrich stated: "Here we go again. In documents obtained by FAIA, Demotech has notified multiple carriers of their intent to downgrade the company's rating from "A Exceptional" to "S Substantial." Also included was a press release dated July 26, 2022, attempting to explain Demotech's role in the Florida market, recent events, and legislative reforms, and stating that all “carrier Financial Stability Ratings (FSRs) have now been updated” on their website. Yet another chapter in Demotech's tumultuous saga of rating Florida's domestic insurance market is about to unfold."

Read the full letter from FLOIR here: