More Than a Dozen Florida Insurers Facing Ratings Downgrades


The rating agency responsible for assigning financial stability ratings (FSR) to more than 40 Florida domestic insurers has warned that several carriers will receive downgrades due to deteriorating conditions in the state’s property insurance market, and more than a dozen more could be downgraded in the next few months.

In a letter dated Dec. 20, 2019 that was forwarded to Insurance Journal, Demotech President Joe Petrelli warned Barry Gilway, head of state-backed Citizens Property Insurance Corp., that Gilway’s hoped-for shrinking of Citizens’ policy count might be “more difficult than expected as Demotech would be downgrading several carriers in January, February and March 2020.”

Petrelli confirmed the authenticity of the letter in an e-mail to Insurance Journal this week and said the names of the insurers facing downgrades could not be disclosed, but that Demotech expects two to four downgrades by the end of January and then another four to six by the end of March.

Petrelli said current market forces as well as carrier specific financial metrics have created a hazardous financial environment for many insurers. Though he acknowledged reforms passed in Florida to curb abuse of assignment of benefits agreements could provide some relief, Petrelli said the impact of the legislation passed in the 2019 session would be “long-term.”

The head of the actuarial firm that rates the Florida insurers described what he sees happening to place ratings in jeopardy.

“The economics of the marketplace over the past several years have made it impossible for Demotech to sustain each of the Florida focused carriers that we review each quarter at a [FSR] of A, Exceptional,” he said.

Petrelli said that after Demotech reviewed the third quarter 2019 financials of carriers, it requested year-end projections of operating results for nearly half of the 40-plus carriers it reviews and rates.

“Having provided these carriers with ample time to implement revised business models, secure capital infusions, implement rate revisions, re-underwrite established books of business and utilize other enterprise risk management activities, it is apparent that few have returned to profitability,” Petrelli wrote.

He noted that as many as 18 out of the 40 plus companies Demotech reviews “will not produce a level of pre-tax profitability consistent with sustaining an FSR at the A level nor position themselves to do so in the near term.”

Petrelli cited several factors that have affected the financial stability of carriers in the Florida market over recent years, including:

  • Insurer investor capital appears to be exiting rather than entering Florida.
  • A “burdensome” level of holding company debt and the interest of that debt that was infused to support growth, permit the strengthening of loss and loss adjustment expense reserves without a diminution of surplus, or otherwise support the implementation of business models, given the operating results, e.g. losses, of carriers that had to address the natural disasters of 2016 through 2019.
  • The rising cost of reinsurance in in 2019.
  • The cumulative impact of carrier acceptance of rate revisions at a percentage change that eliminates the time, effort and expense for a hearing and decision, i.e., less than 15%, has had a cumulative impact over the past several years. Rates are below where they should be because companies have taken smaller than needed rate increase, according to Demotech.
  • Judicial decisions that Demotech says have revised the claim settlement landscape.
  • The revised rules of engagement for claims settlement, as set by the judiciary, have had an undue impact because the natural disasters of 2016, 2017, 2018, and the hail and tornadoes of 2019, have increased the number of claims that could be subject to the new rules of engagement.

The letter was also forwarded to the Florida Office of Insurance Regulation, which confirmed its receipt. The regulator would not comment on the current state of the Florida insurance market but said “Florida is one of the most complex insurance markets in the world. OIR is closely and consistently monitoring the financial condition and operational results of the state’s domestic property insurers. As always, OIR engages in regulatory activities to protect consumers.”

Gilway, who also confirmed receipt of the Demotech letter to Insurance Journal, said Citizens is a state-run insurer and has no regulatory authority over private insurers, though it pays close attention to the market.

“We will continue to closely monitor market conditions and are ready to perform our residual duties if called upon to do so,” he said in a statement.

Jeff Grady, president and CEO of the Florida Association of Insurance Agents (FAIA), noted that Demotech has issued similar warnings of ratings downgrades before and not followed through, but added “There is no doubt the financial results of Florida’s domestic property market were abysmal in the third quarter.”

He said if these trends continue and a significant number of carriers are downgraded by Demotech, other interest groups including realtors and bankers will also be significantly impacted and quickly become part of the larger group searching for a solution…Read more>>