Demotech notifies 17 property insurance companies of rating downgrades

Florida insurance rating agency Demotech has notified about 17 property insurance companies that their ratings will be downgraded when reviewing 2022 hurricane season reinsurance packages, according to a letter from the Florida Office. of Insurance Regulation (OIR).

On Thursday, OIR Commissioner David Altmaier sent a letter to Demotech Chairman Joe Petrelli, sternly asking the agency “to conduct a more comprehensive review” of the rating downgrades. According to the letter, approximately 17 national insurance companies informed the OIR that Demotech had sent them letters informing them that their ratings would be downgraded from an “A” meaning “Exceptional” to an “S” meaning “Substantial” or “M” stands for “Moderate”.

These ratings are Financial Stability Ratings (FSRs) which not only allow businesses to operate in the state, but many Florida agents can only market and write policies for agencies with “A” ratings. , according to the Insurance Information Institute. They also determine the types of loans homeowners can get.

When a company receives an “NR” or no rating, it runs a high risk of being placed into government receivership, which could lead to rehabilitation or insolvency.

In a May interview with the Insurance Information Institute regarding FedNat’s downgrade, spokesman Mark Friedlander explained why it’s hurting a business.

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“It prevents them from insuring homes that have federal mortgages and in some cases it will prevent independent agents from representing them. They will no longer be able to market their products to their clients because independent agents will generally only represent companies rated A. So in other words, it basically freezes their business. It’s not a sustainable model,” Friedlander explained.

Altmaier wrote:

“As such, we have endeavored to ensure that Demotech is able to derive its ratings based on the consistent and objective application of its own standards. However, as the OIR learns more about notification letters sent to companies and given the impact these actions have on millions of Floridians, countless Florida jobs and businesses, this type of unilateral action deserves further scrutiny. OIR is obligated to taking the extraordinary step of reviewing these unprecedented actions to protect the Floridians we serve, particularly two months into hurricane season, is an example of the inconsistent monopoly power of a select rating agency and attempts to exercise coercive influence over Floridians and policy makers for the purpose of thwarting public policy according to one’s own views.”

Altmaier says there are discrepancies in the agency’s ratings operations and is asking the agency to report on them and allow companies to appeal its decision, “as permitted by Demotech’s published methodology.”

Commissioner Altimaier is also asking Demotech to provide companies with a route to review or appeal these ratings.

We reached out to Demotech representatives for a response on Thursday evening. We haven’t had a response yet.

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

“The market reaction to the legislative special session was very negative as seven insurers imposed a moratorium on writing new business in Florida since late May and the global reinsurance market also reacted very negatively, criticizing the legislator for not failing to take strong enough action to stop contractors’ plans and excessive litigation filed against Florida insurers.

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

Freddie and Fannie are federally backed mortgage lenders 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 authorized rating agency in Florida, Freddie and Fannie require that the insurance company have an “A” rating or better from Demotech.

In its letter, Patronis calls Demotech a “rogue rating agency” and advises loan servicers to reconsider their reliance on the agency.

Florida Association of Insurance Agents President Kyle Ulrich also reacted to Demotech’s ratings downgrades in a blog on their site.

In it, Ulrich said, “Here we go again. In documents obtained by FAIA, Demotech notified several carriers of their intention to downgrade the company’s rating from ‘A Exceptional’ to ‘S Substantial’.” Release dated July 26, 2022, attempting to explain Demotech’s role in the Florida market, recent events and legislative reforms, and stating that all carriers’ “Financial Stability Ratings (FSRs) have now been updates” on their website. Yet another chapter in Demotech’s tumultuous saga of Florida’s domestic insurance market is about to unfold.”

Read the full letter from FLOIR here:

Kristan F. Talley