A Year After Uproar over Demotech Ratings, Little Has Changed, But Questions Remain

A little more than a year ago, the Demotech financial rating firm ignited a storm of controversy in Florida when it sent letters to a reported 16 insurance carriers, warning that the companies were about to have their financial stability ratings downgraded.

It was arguably the height of the property insurance crisis in Florida, with one insolvency after another, and tensions were high across the state. Florida regulators and the Florida Association of Insurance Agents soon fired off sharply worded letters of their own, questioning Demotech’s methodology and motives. Others in the industry wondered how those carriers could go from years of “exceptional” ratings to suddenly having poor ratings or none at all. Some carriers vowed to drop Demotech and seek a new rating firm, and state officials hired a consultant to explore new options.

A year later, Demotech has posted new ratings for most Florida-admitted carriers, based on financial information for the first quarter of 2023. Late last week, the firm’s ratings web page shows that almost all of the ratings for Florida’s 50 largest insurers have remained unchanged from the previous quarter, and all of the ratings were among the highest that Demotech assigns – “A Exceptional” or “A’ Unsurpassed.”

See the Top 27 P/C Insurers’ Latest Financial Ratings Here

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Those sterling marks have led to more questions, with some in the industry wondering how carriers in Florida’s distressed market could maintain such financial strength in early 2023, long before recent legislative reforms have had an impact, and just months after being warned about a potential downgrade.

Leaders at Demotech have offered little communication about what has happened in the last 14 months. Florida’s insurance commissioner, some insurance executives and the FAIA all said they’ve heard little from Demotech since the uproar last summer.

And Demotech President Joe Petrelli isn’t saying much.

“I will not and did not comment on your inquiry related to rating issues of carriers rated and reviewed by Demotech,” Petrelli said in an early August email to Insurance Journal.

Petrelli did seem to suggest, however, that all is not well in the Florida market: He referred to the Florida Office of Insurance Regulation’s July 1 stability report, which stated that 18 insurers had been referred for enhanced monitoring due to financial concerns or significant pullbacks in renewals or new business.

Florida Insurance Commissioner Michael Yaworsky said last week that only two of those 18 referred carriers were actually placed into enhanced monitoring, after OIR actuaries reviewed their information. The office, by law, is barred from naming the insurers.

“The triggers and mechanisms may or may not be the same triggers that Demotech has,” Yaworsky said. “I don’t know if [Petrelli’s comment] is a signal that Mr. Petrelli is somewhat mirroring our process.”

Yaworsky, who took office in February after previous Commissioner David Altmaier stepped down, said that in the year since Altmaier penned his letter to Demotech, OIR has had scant communication from Petrelli, other than a July 2022 reply.

“We haven’t really gotten a ton of substantive feedback on Demotech’s process, since Mr. Petrelli’s letter,” Yaworsky said.

In his July 26, 2022 communication to Altmaier, Petrelli did not directly address all of the commissioner’s and the industry’s concerns about its rating process. But he noted that the firm provides insurers with opportunities to address and improve their financial stability ratings, known as FSRs.

“Despite multiple opportunities and remedies to sustain an FSR, some insurers are unable to do so (often due to reasons comparable to those OIR referred for enhanced monitoring, as referenced in the OIR Property Insurance Stability Report dated July 1, 2022),” Petrelli wrote, parentheses his.

It’s unclear how many Florida insurers were able to salvage their ratings through further information to Demotech or with infusions of capital. But the latest round of ratings suggest that most, if not all, are now in stellar financial shape. None were downgraded from previous reviews.

After the controversy broke last year, a few carriers vowed to drop Demotech and seek review by other rating firms, such as AM Best or KBRA, formerly Kroll Bond Rating Agency. In the last year, though, only three insurers, First Protective Insurance, part of Frontline Insurance; Olympus Insurance; and First Community Insurance have done that.

None of those have achieved a top rating from KBRA or AM Best in the last several months.

Some carriers are rated by more than one rating firm. Most of those appear to have a slightly lower rating with KBRA or AM Best than they have with Demotech.

One insurance company, Auto Club Insurance Co. of Florida, left Demotech in 2019, but has continued to subscribe to AM Best’s services. Former President Peter Corrigan, now retired, said his company dropped out of Demotech mostly because of the six-figure price to be rated. Demotech’s service was slightly more expensive than AM Best at the time, he said.

Corrigan credited Demotech with providing a vital service in the years after Hurricane Andrew in 1992 tore through the Florida insurance industry, prompting some larger carriers to leave the state. Few of the smaller carriers left standing had the financials or claims history needed to be rated by AM Best.

“The domestic insurance industry in Florida would not exist without Demotech,” Corrigan said.

Others, including former Florida Commissioner Kevin McCarty, last year urged insurers and regulators not to shoot the messenger, arguing that Demotech’s 2022 warning letter to carriers was simply a reflection of the dire state of many companies in the Florida market.

Still, some in the insurance business have continued to raise questions about Demotech’s standards and methodology in the last 12 months. In a Q2 earnings call in late July, the head of reinsurance at Everest Re Group, Jim Williamson, noted that the company had adjusted its portfolio, shedding some Florida carriers, despite their strong Demotech reviews.

“A number of the Demotech-rated Florida specialists, frankly, did not pass our financial underwriting standards, and we moved away from them and redeployed the capital elsewhere,” Williamson said.

The Florida market may have more to go on come September. That’s when Demotech is expected to release new ratings based on second quarter financial reporting from insurers.

Chart at top: Click here to see the top 27 Florida insurers’ ratings. Click here to see the next tier.