Insurers brace for new ratings

Some Florida consumers may be forced to find a new policy if their carrier is hit with a downgrade

Looming ratings downgrades for six to eight Florida-based property insurers could affect about 250,000 policyholders statewide, forcing some to find new insurers, according to sources familiar with an advisory issued this week by ratings agency Demotech. The company, whose Financial Strength Ratings determine which insurers are acceptable to lenders of mortgages backed by Fannie Mae and Freddie Mac, also announced that two state Supreme Court rulings that went against insurers in 2016 prompted it to suspend the standards by which it rates 57 Florida insurers.

The rulings, along with increased claims costs blamed on the Assignment of Benefits repair clause, have “revised claims procedures, practices, and protocols from the industry standards that previously existed to a ‘Florida only’ standard,” Demotech said in the Feb. 6 advisory.

The Ohio-based national ratings firm said it will continue to analyze and rate companies as in the past, “but we will need to do so with a focus on the carriers’ responses to the challenges faced by AOB and the [two Supreme Court cases] in the execution of their business plans.”

The advisory also stated that Demotech asked some companies to “infuse additional capital.” Those that don’t before Feb. 28 “face potential [ratings] downgrades,” Demotech said.

Insurance companies are allowed to secure capital — through debt, asset sales or reinsurance buys — before Feb. 28 and apply it to their balance sheets as if they had it

in place prior to the end of the previous year. The additional capital would show up in the companies’ 2016 financial reports.

Downgraded companies would lose the ‘A’ ratings required by federal lending agencies Fannie Mae and Freddie Mac, potentially forcing their customers to find new carriers to comply with the lenders’ requirements. according to two insurance industry officials.

They said they have conducted discussions with Demotech’s CEO about the issue. Demotech is introducing a new rating of B++ that will replace its previous “S” rating, one of the officials said.

Customers who will have to find new carriers could be force-placed by their lenders — raising their policy costs — or have no choice but to purchase policies from state-run Citizens Property Insurance Corp., the so-called insurer of last resort, the two officials said.

Demotech CEO Joseph Petrelli declined a request to be interviewed for this story, deferring further explanation to conference calls open to interested parties at 2:30 p.m. and 4:30 p.m. on Friday.

In a Feb. 7 story posted on the website of the trade publication Insurance Journal, Petrelli said 10 to 15 companies could be downgraded in March.

Yet the two industry officials who said they’ve communicated directly with Petrelli said they were told the number of downgrades ranges from four to eight.

Locke Burt, president of Ormond Beach-based Security First Insurance, said he expects downgrades to affect four to eight companies with 250,000 to 300,000 policies — roughly 5 percent of homes in Florida.

Jay Neal, president and CEO of the Florida Association for Insurance Reform, said he was told downgrades are looming for six to eight companies

“The market is due for mergers and acquisitions activity.” Jay Neal, Florida Association for Insurance Reform

with about 250,000 policyholders.

But Neal said he doesn’t expect lenders to take immediate action against downgraded companies.

A more likely scenario would be for the downgraded companies to spare the policyholders by rapidly merging with or being purchased by companies with healthier balance sheets.

“The market is due for mergers and acquisitions activity,” Neal said. “Some companies will be acquired by companies with capital to bring them into the rating [Demotech CEO] Joe [Petrelli] wants. Others will be folded into smaller carriers.”

Burt said he knows of “several companies that are for sale. They are looking to either merge or find new investors.”

Neal and Burt both said they have good ideas of which companies are in danger, but don’t want to name them. Neal said the companies are not concentrated in South Florida, but have policies spread throughout the state.

Insurance companies sustained considerable losses in 2016, they said.

Demotech’s advisory noted insurers were impacted not only by increased Assignment of Benefits claims, but also by severe weather that “hammered the Sunshine State” throughout 2016.

Those events included a tornado striking Cape Coral in January 2016, Hurricane Hermine striking the Florida Panhandle in early September and Hurricane Matthew’s track along the eastern coastline in October. Numerous companies paid losses from all three events, Neal said.

Burt, whose customers are concentrated in northern and central parts of the state hard hit by Matthew, said “financial reports of Florida-based companies are going to be awful when reported at the end of the month.”

He said his company borrowed $60 million to shore up its 2016 bottom line.

Demotech’s advisory stated that all insurers survived events of 2016, and Neal pointed out that a ratings downgrade does not mean an insurer is failing.

He contended that the downgrades will ultimately strengthen Florida’s market by enabling Demotech to distinguish the strongest companies from the merely healthy companies.

If policyholders are displaced by the downgrades, nearly all would be courted by other private insurers, or go to Citizens if necessary, Neal predicted.

Demotech said its future ratings criteria for Florida companies will be influenced by whether the state legislature takes action this year to reduce losses from Assignment of Benefits abuses.

An assignment of benefits is an affidavit that repair companies often require from homeowners that transfers benefits of the homeowners' insurance policies. Insurers say contractors use assignments to file inflated claims and costly lawsuits. Contractors say assignments protect their interests and allow repair work to begin right away.

State insurance regulators are helping to develop a legislative bill to stem AOB losses, Neal said

Amy Bogner, spokeswoman for the Office of Insurance Regulation, said Demotech’s advisory “underscores the importance of legislative reforms to address the abuse of AOBs, provide consumer protections and promote a stable market for consumers in Florida.”