Demotech downgrades three Florida insurers

One week after Demotech President Joseph Petrelli declared his ratings agency wouldn’t change ratings for 17 Florida insurers it had warned of an imminent downgrade, it downgraded one company and withdrew its rating for two others.

Demotech changed the rating for United Property & Casualty Insurance Co. from “A” — meaning “exceptional” — to an “M” rating — meaning “moderate.” Demotech also withdrew their “A” ratings for Weston Property & Casualty Insurance Co. and FedNat Insurance Co. and didn’t replace them with a new rating.

The downgrades were first reported by the Insurance Journal.

The update, which happened Monday, is the latest twist in Florida’s beleaguered property insurance market, which has seen four companies put into receivership. Dozens more refuse to write new business, and many others have canceled existing customers.

Florida lawmakers attempted to shore up the system in May when they passed a bill in Special Session setting up a $2 billion taxpayer-funded reinsurance pot, to be used by domestic insurers struggling to place reinsurance in the private market.

The new law also aims to cut down on litigation expenses and frivolous roof claims, but Petrelli has been concerned the new law wasn’t enough to prevent more companies from sliding into financial troubles. On July 19, Demotech informed at least 17 companies they would be downgraded the following week.

That sparked a blistering response from Insurance Commissioner David Altmaier and Chief Financial Officer Jimmy Patronis, who blasted the move, saying Petrelli wasn’t taking into account the new law or updated information provided by the insurers.

Patronis wrote to the leaders of Fannie Mae and Freddie Mac, asking them not to use the downgrades to boot homeowners with mortgages backed by those government-supported agencies into force-placed coverage with different insurers. Fannie Mae and Freddie Mac’s underwriting guidelines typically require an “A” rating from Demotech.

Petrelli then backed off, saying he wouldn’t change any rating of the insurers in question for the time being, but there was no time frame for when that might change.

Last week, Altmaier said he was setting up a program to allow Citizens Property Insurance, a state-run insurer of last resort, to be used as a cut-through reinsurance fund for any insurer that received a Demotech downgrade. He said such a program would meet an exception to Fannie Mae and Freddie Mac’s underwriting guidelines and allow homeowners with coverage by those companies to avoid being force-placed into new insurers.

It’s unclear whether the three companies downgraded Monday were part of the initial group of companies warned of a downgrade by Demotech last month, or if they’ll now be able to use Citizens as a reinsurer.

An email to an OIR spokesperson was not immediately returned Tuesday.

Sen. Jeff Brandes, a St. Petersburg Republican who has been critical of the response by the Legislature and regulators to the crisis, said the downgrades are likely just the beginning.

“What we’re seeing is collapse,” Brandes said. “It’s going to get ugly and rates are going to continue to rise.”

He even floated the possibility of another Special Session in the fall, especially if a major hurricane hits the state and wipes out more insurers. At that point, the only option could be direct bailout payments to companies to prevent their bankruptcies and ensuing assessments on all Florida homeowners to pay their outstanding claims.

“We could find ourselves back in Legislative Session handing these companies money to keep the doors open and to manage the policies because that’s where we are,” Brandes said. “It’s cheaper to do that than to let them fail and then tax Floridians on the back end.”