Another look at the Florida Ratings Flap; and Petrelli Calls Citizens Re Idea ‘Creative’

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The latest news about Demotech and the Financial Stability Ratings (FSRs) of 20 Florida insurers is now here…almost. One important question remains unanswered.

Before answering this question, and for those who are new to the discussion, a general summary of what is going on is available in Kyle Ulrich’s blog. As president of the Florida Association of Insurance Agents (FAIA) he has a global perspective. It’s no coincidence that his blog begins and ends by asking the unanswered question: “Is it time for Florida to open a website on Demotech?”

He wasn’t the only one to disagree with Demotech’s president, Joe Petrelli, whose letter to the CEO warned of an impending downturn….


Petrelli turned on the fire so he wouldn’t say it. Florida CFO Jimmy Patronis immediately wrote to federal officials (the heads of the Federal Housing Authority, Fannie Mae and Freddie Mac) calling Demotech’s methods “questionable.” Insurance Commissioner David Altmaier demanded that Petrelli answer specific questions about “inconsistencies” in his conduct. And the FAIA (and others) criticized Petrelli’s plans calling them “nonsense” or saying… “many industry watchers often roll their eyes every time Joe Petrelli speaks.” (See Note #1 below)

The highlight was the comments from Frontline Insurance Company. Although most carriers were silent CEO Leman Porter, according to Insurance Journal, published a statement that included the following:

“…This is the story of politics is being played out between Demotech and the Florida Legislature, and between Demotech and Fannie Mae/Freddie Mac to get Demotech’s votes approved. Unknowingly we have caught fire and we will continue this to continue to do well in the market in the near future. ” Emphasis added.

Porter’s “politics” was a reference to what many may not know—that some carriers use another regulatory agency called Kroll or KBRA. It has a competitive advantage over Demotech because its secondary ratings are approved by Fannie Mae but Demotech’s secondary “S” is not. That’s why Petrelli did what he did—force Fannie Mae to accept Demotech’s “S.” It backfired obviously, but, that shouldn’t detract from any importance of Demotech. (See TIP #2 below)

Using the same methods he used in 2017, 2018, 2020 and 2021, Petrelli encouraged others to ask… For one thing, according to many people I have spoken to (and Kyle Ulrich’s blog), Demotech “has been very vocal about changing the rules” and Petrelli asked for a change to the Special Session, sending letters and “respect” before the session was called. Then, after it was all said and done, his “slow down” letter said that law enforcement agencies are working too hard to be “slightly, slowly.”

Not a good way to make friends in Tallahassee. And, as it turns out, not in Washington DC either.

In my opinion, Petrelli not only started Kyle Ulrich’s question, he answered the answer which is……YES!

Yes, Florida needs an alternative to Demotech. And, in my opinion, it should be made by the State of Florida, for the unique needs of the State of Florida.

Look at it this way: Florida had problems with hurricane models, so Florida created its own hurricane model. When Florida faced difficulties finding damaged housing after Andrew, it created FRPCJUA, the forerunner of Citizens. And when Florida faced a crisis with reinsurance Florida lawmakers created The Florida Hurricane Catastrophe Fund.

Now Florida has a problem with a federal agency that threatens to downsize to help lobby the Fed.

Why won’t lawmakers approve and fund the Florida ratings office? It should be politically independent, of course. It should use a learning curve to crunch the numbers and allocate ratings based on those numbers and Fannie and Freddie requirements. There are no threats. No last minute downloads. And it must have secondary ratings that even if it is not a perfect “A” it would meet the requirements of the secondary credit market, such as Kroll. Putting aside the issue of mortgages, what is the benefit that is lowered just days before the carrier goes bankrupt? (See TIP #3 below)

THIS WILL BE IT– Before long I wrote all the above OIR publishes its response-temporary insurance arrangements through Insurance Citizens who are experiencing discounts from Demotech. It’s a good idea, it’s already approved by law and allows insurers to continue with their ratings that are acceptable to the secondary housing market. Some have said it’s an “elegant” approach. Altmaier said “If we want to use this option temporarily, consumers won’t have to look elsewhere for coverage, agents won’t have to move policies, and borrowers can be confident that these insurers will continue to meet mortgage eligibility.”

With the exception of Joe Petrelli, who I haven’t spoken to, everyone seems to like OIR’s smart approach. (See Editor’s Notes, below). Kyle Ulrich, who I haven’t talked to yet, seems to like you, check out his latest blog. (See Note #3 below) And, for what it’s worth, I love it too. Mainly because it made Kyle Ulrich’s “turn the page” question easier to answer.

All that’s left now is how to make the so-called “beautiful” solution sustainable.

After all, OIR has indicated that Florida may not even need a rating agency.

NOTE #1: see Letters from CFO Patronis; see Blog from Kyle Ulrich; see the letter from Commissioner Altmaier; see letter from Petrelli to Altmaier.

NOTE #2: Kroll or KBRA among other things, they do financial service ratings in various categories including insurance. The explanation I received was that at the time Demotech dropped the carrier, Kroll’s second BBB rating would allow him to continue receiving mortgages under Fannie Mae. This competitive advantage has been very difficult for Demotech.

NOTE #3: Citizens’ answer to providing quota share reinsurance to private market sellers is similar to the one I wrote for FAIA 15 or so years ago, the Windstorm Coverage Fund (WCF). Carriers can choose to purchase hurricane points as needed to underwrite points that are offered to the rest of the market. The proposal was written, numbers were run and presented to lawmakers where it was summarily dismissed by industry lobbyists.

This story started on July 29 at Scott Johnson’s blog site. Johnson is a former FAIA vice president, consultant, blogger, and author of books on insurance and corporate management. In the 1980s, Johnson was vice president of Shamrock Automation Systems, an insurance software company.

Editor’s note: Petrelli did not comment on claims that Demotech floated the potential downgrade as a way to force Fannie and Freddie to accept less than “Special” financing strength. But he said Demotech has played an important role in reassessing the power of Florida’s insurance industry, where other accounting firms might not.

On the proposal to use citizens to give approval or reinstatement of other carriers who are in danger of losing their ratings or who may be in financial trouble, to ensure the approval of Fannie and Freddie, Petrelli called it “a. interesting story.

“My initial thought is that before we issue any portion of the FSR, we want to see a cut in reinsurance,” Petrelli said in an email to Insurance Journal. “Secondly, even though Citizens is a government-backed organization, we need to reassess how it can become a re-assurance company.”