Demotech Affirms Ratings of 37 Florida Insurers; Still Reviewing Others

Demotech has affirmed 37 of the 46 Florida-based companies rated by the actuarial firm, as of March 26, according to information gathered from Demotech’s website. That leaves fewer than 10 Florida insurers that are still awaiting a decision on their financial stability ratings (FSR) from the Ohio-based ratings agency.

Demotech said it is continuing to review both public and proprietary financial information and have discussions about business plans with the yet-to-be-affirmed insurers.

In mid-March, Demotech affirmed a slew of companies (see chart) and this week affirmed several others, including Capitol Preferred Insurance Co., Gulfstream P&C Insurance Co., and Security First Insurance Co.

The companies that are still in discussions and will either be affirmed or downgraded, as of March 26, include: Avatar Property & Casualty Insurance Co., Centauri Specialty Insurance Co., Cypress Property & Casualty, Omega Insurance Co., Safepoint Insurance Co., Tower Hill Select Insurance Co., and Tower Hill Signature Insurance Co.

The Florida Office of Insurance Regulation approved Tower Hill Select and Omega merging into Tower Hill Signature on March 25.

Demotech Actions

“Demotech has downgraded a number of carriers. Another subset of the carriers that we review and rate have opted to be purchased so that investors can exit the Florida residential property insurance marketplace. A larger number have been affirmed based upon (or in spite of?) their year-end operating results. Another group continues to dialogue with us and share their thoughts on the marketplace, how their business model must adapt, etc.,” Demotech President and Founder Joseph Petrelli said in a statement to Insurance Journal on March 25.

Companies that have not had their ratings affirmed as of press time are not necessarily being downgraded, and delays in ratings affirmations should not be misconstrued, according to Demotech. Many companies have avoided ratings downgrades by being acquired (see chart), or injecting significant capital into their books, while others have been able to sustain their rating by providing Demotech proprietary or confidential information that is not in the public domain, the company said.

In comments on its March 23 affirmation of Gulfstream P&C, Demotech Vice President Sharon M. Romano Petrelli said a delay in a rating affirmation should “not be made into something bigger than it is.” Gulfstream’s company business model kept them at the A level, despite increases in reinsurance costs anticipated in 2020 and litigation trends in the state. “The management team at Gulfstream has met or exceeded our financial metrics for the past several years,” she said.

Joseph Petrelli added that while Demotech reviews public information on all the carriers it reviews and rates, it also reviews holding company and affiliated entity financials when necessary.

“Gulfstream invited us to do so to better understand how they had positioned themselves to address the myriad issues facing the residential property insurance markets in Florida,” Petrelli said. “Given the breadth and scope of their capability to honor their commitment to policyholders, we needed additional time to digest their additional information.”

For Security First, which was affirmed on March 24, Petrelli said succession planning, managing claim litigation in a difficult judicial environment, and astute reinsurance purchasing are “three facets of the company’s enterprise risk management program that support” sustaining an FSR at the A level, “despite the projected increases in reinsurance costs anticipated in the near future.”

Demotech did not release a statement on the ratings affirmation of Capitol Preferred, which has a 36.5% rate increase request still under consideration by the Florida Office of Insurance Regulation. The company’s CEO told regulators at a rate hearing in February that the company needed the increase because of reinsurance costs, assignment of benefits (AOB) abuse and first party lawsuits.

January Warning

These long-awaited ratings announcements follow Demotech’s warning in January that it may downgrade as many as 18 of the 46 Florida domestic insurers it rates.

In a letter to Florida’s Citizens Property Insurance President and CEO Barry Gilway that was obtained by Insurance Journal, Petrelli outlined several factors in the state that were placing insurer ratings in jeopardy, including abuse of assignment of benefits agreements and first party litigation.

“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.

Since then, several Florida companies have made moves. Anchor P&C ceased its operations and sold its policies to Homeowners Choice Insurance. Prepared Insurance was acquired by Lighthouse Property Insurance Corp. This week, the state approved the merger of the two Tower Hill companies.

Demotech would not disclose the names of the insurers it is still reviewing, but Petrelli said he expects it will announce several downgrades at the end of March. Petrelli told Insurance Journal this week that Demotech is in the process of having “thoughtful and focused” discussions with the management of the insurers not yet affirmed.

“If we are convinced that their action has addressed previous matters brought to their attention, and will facilitate their operational effectiveness in the ever-changing circumstances of the most difficult operating environment in the US, and provide them with the opportunity to make a reasonable profit, we sustain the Financial Stability Rating,” he said.

He also noted that some downgrades from ‘A’ FSR (Exceptional) to S (Substantial) are as much a reflection on the operating environment in Florida as they are on a carrier.

“It is the marketplace more than carrier-specific metrics that is driving the need for downgrades. If these carriers were focused on any other jurisdiction, they would be sitting in the driver’s seat,” he said.

Petrelli added that carriers that have sustained their ratings to date have shown Demotech “how they intend to fulfill their commitment to Floridians through their business model.”

Related:

• Update: Demotech Evaluating 2019 Results of Florida Carriers, Expects ‘Many’ Downgrades
• Florida Carriers Seek Staggering Rate Increases Amid Market Turmoil
• AM Best: Florida Insurers Brace for Challenging June Reinsurance Renewals
• HCI to Acquire Policies of Florida’s Anchor P&C; Weston to Acquire Anchor Specialty
• More Than a Dozen Florida Insurers Facing Ratings Downgrades
• An Update on Florida Insurer Downgrade Situation: Demotech Commentary
• January 2020 Reinsurance Renewals Varied Significantly, Brokers Say
• State Finds Florida Specialty Insurance Insolvent; 90K Homeowners Lose Coverage
• Rehabilitation of Florida Insurer Windhaven Deemed ‘Useless’; Judge Orders Liquidation
• Citizens to Evaluate Policyholder Count as Florida Market Conditions Tighten
• Demotech: Expect 2018 Catastrophe Losses to Impact Florida-Based Insurers
• Demotech Affirms Ratings of Florida Insurers
• Demotech Holds-Off on Affirming Ratings for 16 Florida Insurers
• Florida Property Insurers Avoid Ratings Downgrades From Demotech, For Now
• Demotech Suspends Florida Insurer Rating Criteria; Says Downgrades Coming

Topics Florida Carriers Reinsurance Property Property Casualty