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Demotech downgrades 1, withdraws 2 Florida property insurance ratings so far

Florida's rating agency makes its first changes to financial stability ratings after evaluating reinsurance packets
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Posted at 1:19 PM, Aug 02, 2022
and last updated 2022-08-03 09:53:41-04

TAMPA, Fla. — As of August 1, Florida’s rating agency, Demotech, downgraded the financial stability rating of one property insurance company and withdrawn ratings for two others.

Demotech downgraded United Property & Casualty Insurance (UPC) from an “A” meaning exceptional, to an “M” meaning moderate.

The agency also withdrew ratings for Weston Property Insurance, which previously had an "A" and FedNat, which had previously been downgraded from an "A" to an “S” substantial in April.

The agency also downgraded Florida Family Insurance Company from an Aʹ (A Prime) to A and Florida Family Home Insurance Company from an Aʹ (A Prime) to A. However, these specific downgrades will not affect the company's operations in the state since they are still A's.

A financial stability rating (FSR) is a registered certification mark of Demotech and is determined by “a company’s ability to survive a downturn in economic conditions as well as a downturn in the underwriting cycle and meet its policyholder obligations in any event,” according to the Demotech website.

A study by Guy Fraker called 'Florida’s P&C Insurance Market: Spiraling Toward Collapse', commissioned by the Senate Banking and Insurance Committee, found that UPC was one of the top companies for the largest net financial losses in 2019.

Its underwriting losses were 35,544, and its net income loss was 20,828. In 2019, UPC had about 5.3% of the Florida market with 761,039 policies. They also had 1,405 pending lawsuits, an 80% increase from 2016.

We also know that FedNat dropped about 60,000 customers, or half their policyholders, in recent months in order to avoid going into receivership. According to the same study, FedNat had underwriting losses of 38,816 and a net income loss of 18,174.

In 2019, FedNat had 4.2% of the Florida market with 605,202. They also had 1,261 lawsuits, an 81.4% increase from 2016.

The study also states that in 2019, Weston Insurance had 0.6% of the Florida market with about 80,000 policies and 17 lawsuits. The Insurance Information Institute tells us that Weston now has about 20,000 policies.

Mark Friedlander with the Insurance Information Institute said that FedNat's CEO resigned on Friday, and a board member is temporarily filling the position.

In addition, "UPC has also been going through a lot of change," Friedlander said. "Two weeks ago, their board of directors announced they were exploring a sale or merger, so that was a big red flag just a couple of weeks ago, that they are looking for significant financial investment in order to stay afloat."

Demotech had originally planned to release new ratings on July 26, as stated in a release, but decided to postpone.

The rating delay came after a letter from the Florida Office of Insurance Regulation (OIR) expressed deep concern with the possible downgrade of about 17 companies, requesting the agency go back and re-evaluate their ratings methodology.

The rating agency said in a response that they had been working with insurance companies to allow them to further prove financial stability.

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

"The point of a rating is to show financial stability that you are a solid company that can pay your claims and with no rating, a company cannot show that, that's just not possible. So in most cases when we see a rating withdrawn, that is the first step towards insolvency," he said.

However, it's unclear what these rating downgrades truly mean for these companies, agents, and homeowners.

Prior to emergency action from OIR last week, any rating less than "A" would disqualify homeowners from receiving Freddie Mac and Fannie Mae mortgage loans. The temporary program establishes backup reinsurance from Citizens to any company that is downgraded, which allows their customers to be in compliance with their loan providers.

OIR informed us Tuesday evening that UPC was the first to opt in and qualify for the reinsurance back-up funding. The office also established a new webpage with information.

In addition, independent agents don't typically write for insurers with less than an 'A' rating. Two agents tell us that it's not clear what the effects for them and their clients will be yet. One said they're still concerned that loan providers will require customers to switch carriers.

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The Insurance Information Institute predicts Weston and FedNat will be the 5th and 6th insurance companies this year to go into receivership, the highest number in Florida since Hurricane Andrew in 1992.

"We know the ratings are withdrawn, they will not be able to continue to operate unless they do a major reorganization. And get new capital infusions, so most likely they are heading towards insolvency," Friedlander explained.

He suggests anyone with one of these three insurance companies call their agent.

"If I'm a policyholder one of those companies, I call my insurance agent as soon as possible. Ask them what they know and tell them to shop my coverage. So you are prepared, because if they head towards the receivership and liquidation process, they will get 30-day notices that they have to move their policy, it's going to be canceled on X date," Friedlander advised.

We have inquiries into all three property insurance companies for further information on what customers need to know. We have not heard back yet but will update this article when we learn more.

As far as criteria for FSR's, Demotech states on their website:

"Our rating process is based on an analysis of a series of quantitative ratios and certain qualitative considerations. Typical information reviewed by Demotech for an established insurer may include:

  • Quarterly and annual statutory financial statements
  • Management discussion and analysis
  • Statement of actuarial opinion
  • Actuarial opinion summary
  • Audit report
  • Reinsurance information."

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