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New Insurance Challenge: Rating Downgrades

Demotech rates insurers’ financial health and warned 17 Fla. firms of a possible downgrade. That creates homeowner problems if Fannie or Freddie hold the mortgage.

TALLAHASSEE, Fla. – Florida regulators scrambled Thursday after they said a financial-ratings agency notified about 17 property-insurance companies of potential ratings downgrades.

Insurance Commissioner David Altmaier and state Chief Financial Officer Jimmy Patronis questioned the ratings agency, Demotech, Inc., and warned that such widespread downgrades could affect homeowners across the state.

The ratings are important for homeowners with loans owned by Fannie Mae or Freddie Mac because the lending giants require property insurers to maintain an adequate financial rating. If the rating isn’t considered adequate, homeowners must find other coverage.

So far, the insurers have only been warned.

In letters Thursday to leaders of the mortgage-finance giants and the director of the Federal Housing Finance Agency (FHFA), Patronis criticized Demotech and the possibility that downgrades would lead to insurers not meeting the ratings requirements and, as a result, creating problems for policyholders’ mortgages.

“If (Fannie Mae and Freddie Mac) de-authorized a sizeable percentage of Florida’s insurers based on the dubious ratings of one company, it would create financial chaos for millions of Floridians,” Patronis wrote.

The state Office of Insurance Regulation late Thursday afternoon released Patronis’ letters and a letter that Altmaier wrote to Demotech President Joseph Petrelli. The documents did not name insurers that could face downgrades, with Altmaier saying “approximately 17” could be affected.

Downgrades would add to existing problems in the state’s property-insurance market, as many carriers have dropped customers and sought major rate increases because of financial losses. Four property insurers have been declared insolvent since late February, and thousands of policies a week pour into the state-backed Citizens Property Insurance Corp.

Gov. Ron DeSantis called a special legislative session in May to try to help stem the problems. While lawmakers made a series of changes, they acknowledged that the market would not be fixed quickly.

In a June 30 news release, Demotech said it was continuing to “review, analyze, and evaluate Q1 (first quarter) 2022 operating results, catastrophe reinsurance programs, disaster recovery plans, catastrophe response plans, the legislation emerging from the special session at the end of May 2022, and other considerations. These factors, and others, influence Demotech’s quarterly assessment of financial stability ratings assigned to carriers writing residential property insurance in Florida.”

But in a three-page letter Thursday to Petrelli, Altmaier raised questions about issues such as Demotech’s ratings methodology.

“Given the potential impact of Demotech’s financial ratings, OIR (the Office of Insurance Regulation) believes Demotech should perform a more comprehensive review, using consistent standards, of the proposed ratings prior to their effective date,” Altmaier wrote.

“Additionally, in the interest of stabilizing the private market and ensuring companies have all necessary information to take appropriate corrective action, we strongly encourage Demotech to clearly communicate its rating standards and methodology prior to these ratings becoming effective.”

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