State: Insurers ratings downgrades could mean chaos for homeowners [South Florida Sun-Sentinel]

State insurance regulators and the Florida Association of Insurance Agents are outraged over letters that Ohio-based Demotech, which assigns financial strength ratings to Florida-based insurers, sent on Tuesday to about 17 of those insurers telling them their A ratings will be downgraded on July 26.

In Demotech’s rating system, A stands for “unsurpassed” or “exceptional.” Demotech’s letters told the insurers they would be downgraded to S “substantial,” or M “moderate.”

The downgrades threaten to throw Florida’s already beleaguered insurance market into further turmoil because federally backed mortgage guarantors Fannie Mae and Freddie Mac require borrowers to maintain insurance coverage from A-rated carriers.

Under a worst-case scenario, the downgrades could place tens of thousands of Florida homeowners at risk of defaulting on terms of their mortgage loans.

If those borrowers go into default, Fannie and Freddie, which back a majority of home loans, could require mortgage servicers to forcibly place acceptable insurance on their homes.

In a letter sent to Demotech CEO Joe Petrelli and released publicly late Thursday afternoon, Florida Insurance Commissioner David Altmaier asserted that Petrelli gave the 17 insurers reasons for the downgrades that did not match the financial strength ratings methodology posted on Demotech’s website.

Altmaier, while not specifying the reasons outlined by Petrelli, demanded to know “why these discrepancies exist” and challenged Demotech to prove the downgrades were “not made in a capricious manner and are fairly and consistently applied.”

Altmaier’s letter was released by the Office of Insurance Regulation alongside a news release from the Florida Association of Insurance Agents warning that agents face errors and omissions claims if downgraded insurers damage homeowners.

He questioned why the downgrades were scheduled two months into hurricane season, and why Petrelli was not giving the companies a detailed explanation for the downgrades or a formal process to appeal them.

“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 said in the letter.

The unsigned release by the agents association asked whether Demotech had an ulterior motive for the timing of the downgrades. “For years, Joe Petrelli has unsuccessfully tried to convince Fannie and Freddie to accept Demotech’'s “S Substantial” rating [as suitable coverage for borrowers],” it said. “Does downgrading a large number of companies primarily operating in Florida, one of the largest insurance markets in the world, provide the leverage he needs to get approval?”

The release concluded by asking whether it’s time for “insurers, lawmakers, and regulators to look for a more stable and predictable alternative to Demotech?”

Copies of three letters from Florida’s Chief Financial Officer Jimmy Patronis to the heads of Fannie Mae, Freddie Mac, and the agency that oversees them, the Federal Housing Finance Agency, were included with Altmaier’s letter and the agents’ statement in the email release by the Office of Insurance Regulation.

Petronis called Demotech a “rouge ratings agency” and said he was concerned that Fannie and Freddie’s underwriting guidelines have “inadvertently” allowed Demotech to play “havoc with the financial lives of millions of Floridians.”

The letter stated, “The purpose of this letter is to urge you to reconsider your reliance on Demotech as the primary ratings agency for rating the strength of Florida’s domestic insurance market, and to give Florida leaders time to identify a suitable alternative ratings body to evaluate the financial strength of Florida insurers.”

Asked by email for comment, Petrelli said “Each communication has errors in facts and logic. Also, we are not the insurance industry’s rating monopoly. End comment for now.”

The best-known ratings agency in the nation, A.M. Best, has long determined that Florida-based carriers are not capitalized well enough to warrant its rating.

The conflict comes at a perilous time for Florida’s insurance industry. Four companies have gone into insolvency since February. The latest, Southern Fidelity Insurance, left 80,000 policyholders scrambling to find new coverage. In May, FedNat and its sister companies Monarch National and Maison received authorization from state regulators to drop more than 68,000 policies as part of a reorganization.

Gov. Ron DeSantis ordered a special legislative session in May to pass reforms that industry leaders say were needed to help companies stave off bankruptcy and provide $2 billion in state-funded reinsurance.

In a May interview with the South Florida Sun Sentinel, Petrelli said it was possible that none of the 40 Florida-domiciled insurers that Demotech rates would have enough claims-paying capacity after June 1 to retain A ratings.

Citizens Property Insurance Corp., the state-owned insurer of last resort, expects to have 1.2 million policies by the end of the year, up from 420,000 in 2019.

Mark Friedlander, corporate spokesman for the industry-funded Insurance Information Institute, said the downgrades weren’t unexpected, considering the financial shape of the insurance industry.

“A mass ratings downgrade of home insurers on this level is unprecedented in U.S. history,” he said in an email. “This is a very unfortunate situation for Florida residential insurers and homeowners, but not surprising.”

“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,” said Friedlander. “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.”

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 [email protected].

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