Demotech says Florida insurer ratings to take longer, defends its process

Rating agency Demotech has now extended the rating revision process for covered Florida property insurance carriers, which had been expected to end today, while at the same time responding to criticism from Florida state leaders.

As we reported last week, Demotech had warned numerous Florida property insurance carriers that they may have faced a ratings downgrade on July 26th, a move that resulted in a backlash from Florida’s state Insurance Commissioner and CFO.

Now, Demotech has said that the deadline of July 26th won’t be met, as it continues to review ratings for these Florida carriers and engages with the companies in question.

Last week, Florida Insurance Commissioner David Altmaier had accused Demotech of discrepancies in its ratings process and of not giving the recently enacted special session reforms a chance.

Commissioner Altmaier said, “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.”

Meanwhile, in a letter to the mortgage GSE’s Fannie and Freddie, CFO of the State of Florida, Jimmy Patronis called Demotech a “rogue rating agency”, and asked for the GSE’s to give time for Florida’s leadership to find an alternative ratings body.

As we said at the time, an alternative ratings agency would not make much difference, as it is the poor capital adequacy and stressed financial state of Florida’s insurance carriers, as well as the litigation plagued Florida property insurance market that is the driver of the reason these carriers are hard to consider credit worthy, not the rating agency that is making the assessment.

The issue is that certain property insurers in Florida are skating on such thin financial ice that they may have had their ratings downgraded to a level where they would be insufficient for a Florida property insurer to write business in the secondary mortgage marketplace, as with a rating below ‘A’, mortgage guarantors Fannie Mae and Freddie Mac won’t accept their policies any more.

Which might result in a much deeper Florida insurance crisis, with downgraded insurers that can’t survive and likely hundreds of thousands of additional policyholders finding themselves insured with Citizens, the insurer of last resort, or having to look for new policies.

This is the crisis that lawmakers and Florida’s government leaders want to avoid.

But, by railing against the rating agency they invited to the state, when other rating agencies would likely take a similarly dim view of the status of these Florida carriers, they’ve shown that they still lack appreciation for the real driver of this property insurance crisis in Florida, the failure of the legislative to quickly stem the litigation tide in the state.

Demotech responded in a letter, which the company shared with Artemis.

The rating agency explained, “We have been consistent in our review and evaluation of companies operating in that marketplace. We continue to be a stabilizing force even as the residential property insurance market has become plagued with litigation, and, some believe, fraud.”

Demotech also clarified its process, saying that it has been engaging with the at-risk of downgrade insurers and that at no-time was a threat to downgrade sent to them without them having their usual right of reply and opportunity to engage with the rating agency.

“It has been reported that we sent out letters to rated clients stating that they were scheduled to be downgraded while allowing no discussion or appeal. This is factually inaccurate, as we have conducted discussions with all who requested a discussion, allowing them to state their case and further understand our rationale.

“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,” Demotech said.

Adding that, “It is incongruous for an independent rating agency to be expected to discuss rating actions that are not finalized and include conversations and information intended to be private between the rating agency and the rated entity. As it would be injurious and prejudicial to publish rating actions prior to the completion of our process and finalization of our opinion, Demotech will not comment on potential rating changes until our process is concluded. We will continue to follow our rating methodology and remain an independent observer despite outside pressure.”

Demotech also noted that a key part of its recent acquisition of NRSRO status is “the ability and willingness to resist being leveraged or coerced into actions that are inconsistent with established methodology.”

Further stating that, “In addition, it should be noted that although our published methodology allows for discussion and appeal of rating decisions, it does not include any requirement for Demotech to provide a remedy or allow a rated entity a certain period of time to correct issues. It is completely up to the entity to report acceptable financial results, as Demotech, an independent third party rating agency, is tasked only with reviewing and opining on those results.”

Finally, the rating agency explained why it is now delaying the announcement of rating revisions.

“As the current regulatory climate has become hostile and negative and we have and will expend a significant effort creating responses to third party letters, we will be taking additional time to review information and consider the issues affecting the companies operating in Florida. Our rating revisions originally scheduled to be released Tuesday, July 26th will be announced when we have completed all relevant discussions with rated entities.

“We will be releasing all rating changes to the Florida focused insurers concurrently. Until that time, we will not be commenting further on individual companies nor responding to those outside of the rating process.”

This is a very fair and measured response from Demotech.

It is quite unusual for lawmakers to have come out so strongly against a rating agency, especially when any outsider could see that it has been the inaction of lawmakers that have led to the significant issues in Florida’s property insurance marketplace.

While nobody wants to take the blame for creating the dysfunctional Florida property insurance market environment, the legislative environment has fostered bad actors and enabled profits to be taken out of the industry through litigation.

As we’ve been saying for months now, additional special legislation is needed and quite likely to be seen before next year’s reinsurance renewals come around, as no one in Florida wants to go through a repeat of the last two months.

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