Get ready to pay more for insurance

Letter warns of ratings downgrades for up to 18 Florida companies

Florida home insurers are getting ready to reach into our pockets for more money again.

That’s just one gut punch to consumers in a letter that surfaced last week warning that financial strength ratings (FSRs) of up to 18 Florida-based insurance companies face ratings downgrades between now and the spring.

The other kick to the abdomen: Downgrades could theoretically force thousands of customers of affected companies to seek new insurers, because federally backed mortgage lenders only accept insurers with A ratings from the ratings agency, Demotech.

Demotech has no “A minus” rating. Healthy companies are either A or S, which stands for Substantial.

Companies facing ratings downgrades are not in imminent danger, according to the letter’s writer, Demotech President Joe Petrelli.

Other insurance industry officials agree. “There’s no concern that downgraded carriers will be insolvent or go out of business,” said Paul Handerhan, president of the Florida-based insurance watchdog group Federal Association for Insurance Reform (FAIR). “Petrelli is trying to give companies an opportunity to recapitalize or be acquired by stronger companies.”

But for homeowners, it’s potentially a big problem that Fannie and Ginnie Mae and Freddie Mac

don’t recognize S for Substantial, even though that rating still means the company is sound. It’s A or nothing, and so far that hasn’t been a problem because all active Florida-based insurers have maintained As from Demotech for several years.

One of the most important ways to keep those ratings: Rate increases higher than those Florida homeowners have been forced to swallow over the past several years, Petrelli says.

Reasons for the potential ratings downgrades include burdensome levels of debt taken by the affected companies, loss of investor interest in Florida’s insurance carriers, increased costs for reinsurance stemming from severe weather events, and increases in lawsuits and settlement costs “beyond (insurers’) estimation,” Petrelli wrote.

Petrelli doesn’t identify which companies are in danger of losing their financial ratings.

But he predicted that two to four companies would be downgraded by the end of January, and another 10 to 15 “will face a likely downgrade” following Demotech’s review of the companies’ year-end 2019 data in March. Demotech reviews and rates 46 insurers that write about two-thirds of Florida’s homeowner insurance business.

Locke Burt, a former state senator and current owner of Security First Insurance Co., said in an email that he expects Petrelli’s letter to spur more companies to request rate hikes exceeding 15 percent on average.

Petrelli addressed his letter to Barry Gilway, president and CEO of state-owned Citizens Property Insurance Corp., warning that consumers might be forced to buy insurance from Citizens if the federally backed lending agencies force customers of downgraded companies to find new insurers.

In a news release on Monday addressing issues he brought up to Gilway, Petrelli said Citizens’ competitive rates might have contributed to the problem by suppressing

rate-level requests of private-market insurers.

Gilway last week released a statement saying that Citizens, the so-called “insurer of last resort,” has no authority over private insurers but will “continue to closely monitor market conditions and are ready to perform our residual duties if called upon to do so.”

The potential calamity of forcing tens or hundreds of thousands of homeowners to seek new insurers could be avoided if the federal government agreed to accept Demotech’s S rating as sufficient for borrowers of federally backed home loans, Petrelli pointed out.

Burt pointed out that Demotech’s S rating is equivalent to an A- or B+ rating from bigger and better-known ratings firm AM Best, which is accepted by the federal government.

“The issue is a B rating from AM Best is acceptable for a federally insured mortgage while a Demotech rating of S is not yet acceptable for a federally insured mortgage,” Locke wrote in an email.

Demotech has been seeking federal approval of the S rating since 2012 but no decision has been made, Burt said.

Petrelli has warned of looming downgrades before but then held off, saying affected companies were able to shore up their financial positions. In February 2017, he warned that six to eight insurers faced downgrades unless they infused additional capital to cover potential claims.

That May, Petrelli announced all of the threatened companies followed Demotech’s advice by securing the necessary capital.

FAIR President Jay Neal said FAIR has been urging Demotech for several years to use the S rating to separate the healthy-but-unexceptional insurers from the most stable and well-capitalized companies.

“The market needs a differentiator,” he said. “There are companies with “A” Demotech ratings that aren’t in the same category as other companies. “Downgrading a small number of companies would be good for the market and the fairest thing to do for consumers.”