Insurance company ratings downgrades delayed, Demotech tells state officials

A slew of ratings downgrades for Florida-based insurers won’t be happening Tuesday after all.

The CEO of Ohio-based Demotech, who last week sent letters to 27 insurers telling them that their financial strength ratings would be downgraded on July 26, on Monday afternoon sent a letter to Insurance Commissioner David Altmaier calling it off “until further notice.”

The downgrades, from A, which stands for “Exceptional” or “Unsurpassed,” would place hundreds of thousands, perhaps millions of homeowners with mortgage loans out of compliance with loan terms dictated by federal mortgage guarantors Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac requires homes it backs be insured by A-rated carriers. Numerous Florida carriers are only rated by Demotech, meaning loss of their A rating could put policyholders at risk of having more expensive coverage force-placed by their mortgage loan servicers.

Altmaier and Florida Chief Financial Officer Jimmy Patronis on Thursday wrote Demotech, demanding to know why it had seemingly reached beyond its quantitative ratings methodology and planned to downgrade the companies based on the company’s pessimistic view of Florida’s insurance market.

In letters informing insurers of the impending downgrades, Petrelli said that it would not accept remedies, such as increased capital investment, that it had accepted in the past to allow companies to retain their A ratings.

The downgrades, he said, resulted largely from “the unwillingness or inability of the [Florida] legislature” — during a special insurance session just before hurricane season — “to address longstanding disparate, disproportionate levels of litigation, and increasing claims frequency that has resulted in a level of dysfunction that renders our previous accommodation inapplicable.”

Monday’s letter put those downgrade plans on hold. Florida’s Office of Insurance Regulation released Petrelli’s letter without comment.

The letter said that Demotech would respond to the letters by Altmaier and Patronis on Tuesday, but added “due to various circumstances, Demotech will not take any rating action including affirmation, downgrade, or withdrawal until further notice. While we are unable to provide a specific date for release, we are working to expedite the release of our ratings as soon as possible.”

Following release of Petrelli’s letter on Monday, Petrelli emailed a statement labeling as “factually inaccurate” reports that Demotech told insurers that they would be downgraded and would not be allowed discussion or appeal.

“We have conducted discussions with all who requested a discussion, allowing them to state their case and further understand our rationale,“ the statement said. “Furthermore, we encouraged them to submit clarification or additional relevant information if they so desired. In several cases, this has led to us considering a different rating action. This is the same procedure that we have utilized since being invited to participate in Florida in 1996.”

Paul Handerhan, president of the consumer-oriented watchdog group Federal Association for Insurance Reform, released a statement reflecting the hope that Demotech has agreed to review supplementary information submitted by insurers hoping to maintain their A ratings.

Handerhan’s statement said: “I appreciate the swift action from Florida’s state regulators to protect consumers, and Demotech’s willingness to delay their proposed rating assignments. Hopefully this will give the affected insurers additional time to provide supplementary documentation for Demotech to consider in support of maintaining their current financial stability rating of A, as required by state and federal mortgagees.”

If few or no insurers end up downgraded, it wouldn’t be the first time that Demotech has announced such plans and then changed its mind, according to a news release by the Florida Association of Insurance Agents submitted by OIR with Altmaier’s and Patronis’ letters last week.

That release asked, “Is it time for Florida to turn the page on Demotech?” It explained that Demotech rose to prominence after more than a dozen insurers pulled out of the Florida market following Hurricane Andrew in 1992.

Demotech, founded by Petrelli and his wife, became certified by Fannie Mae and Freddie Mac, making Demotech’s A rating acceptable to mortgage lenders and “thus the de facto standard for practically all of Florida’s domestic property insurers,” the agents association’s release said.

After 25 years, Demotech holds a virtual monopoly on issuing financial strength ratings to Florida domestic carriers, the release stated.

Larger and better known ratings firms, such as A.M. Best, have declined to rate many of the Florida-domiciled carriers, contending they are not sufficiently capitalized.

The agents’ release said Petrelli has “pushed himself further into the limelight by publicly engaging in political theater threatening carrier downgrades, and holding [press conferences] to explain the company’s unchecked behavior and rating methodologies.”

The release said that Demotech’s most recent letter to insurers “appears to be an attempt at showing the company’s strength and power in Florida.” It also noted that Demotech has previously issued notices of its intent to downgrade companies in 2017, 2018, 2020, 2021 and 2022 — warnings “that never came to pass.”

Ron Hurtibise covers business and consumer issues for the South Florida Sun Sentinel. He can be reached by phone at 954-356-4071, on Twitter @ronhurtibise or by email at rhurtibise@sunsentinel.com.

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