Sen. Nelson: Demotech downgrades risk mass FL homeowner ‘disaster’

U.S. Sen. Bill Nelson urged federal officials Tuesday to take any actions necessary to prevent a “disaster ” if mass numbers of Florida homeowners go into default because ratings firm Demotech Inc. lowers safety grades on several property insurers.

U.S. Sen. Bill Nelson, D-Fla.

U.S. Sen. Bill Nelson, D-Fla.

The threatened lower grades from the Ohio-based ratings company could “put thousands of Florida homeowners at risk of defaulting on their home loans,” Florida’s Democratic senator wrote to Steve Seitz, deputy director of the Office of Federal Insurance for the U.S. Department of the Treasury.

“Fannie Mae and Freddie Mac require borrowers to buy insurance from companies with at least an A rating,” Nelson wrote. “If those companies are downgraded to a B rating, thousands of Florida homeowners who currently have insurance policies with those companies could suddenly find themselves in default on their home loans.”

Nelson continued, “Regardless of the reason, the effects of such a downgrade could be devastating. I urge you to look into the situation and take any and all necessary steps to help stabilize Florida’s property insurance market and avoid such a disaster.”

A Treasury spokesman did not immediately respond to a request for comment.

Demotech officials have said guidance on 57 Florida property insurers is under review after  2016 storms and continuing water-claims problems, and an unspecified number face ratings downgrades in March.

Here is the text of Nelson’s letter:

February 21, 2017

 

Mr. Steve Seitz

Deputy Director, Office of Federal Insurance

United States Department of the Treasury

1500 Pennsylvania Avenue, NW, Room 3312

Washington, DC 20220

 

Dear Deputy Director Seitz,

 

I am concerned about recent developments related to Florida’s property insurance market. According to news reports, Demotech, Inc., an Ohio-based insurance-rating company, is threatening to downgrade the financial stability ratings of several property insurance companies in Florida from A to B. Such a move could put thousands of Florida homeowners at risk of defaulting on their home loans.

 

Fannie Mae and Freddie Mac require borrowers to buy insurance from companies with at least an A rating. If those companies are downgraded to a B rating, thousands of Florida homeowners who currently have insurance policies with those companies could suddenly find themselves in default on their home loans.

 

Demotech, Inc. cites several reasons for a potential downgrade, including an increase in water-damage claims and abuse of a practice known as assignment of benefits. Regardless of the reason, the effects of such a downgrade could be devastating. If thousands of Florida homeowners are thrown into default through no fault of their own, it could have a disastrous effect on the state’s economy and financial system.

 

I urge you to look into the situation and take any and all necessary steps to help stabilize Florida’s property insurance market and avoid such a disaster. Thank you for your prompt attention to this matter.

 

Sincerely,

Bill Nelson

Update: Asked for comment, Demotech president Joe Petrelli did not directly address Nelson’s letter but offered these comments:

In 1996, when the State of Florida, we were invited by the Department of Insurance, now Office of Insurance Regulation, and the secondary mortgage marketplace to do so.  The Commissioner was Tom Gallagher.  The State needed to address the issue of insurer acceptability in Florida.  They contacted Demotech.  In 1989, Freddie Mac and Fannie Mae had become familiar with us and accepted our Financial Stability Ratings® (FSRs) of A or better.  We developed a procedure.  Our procedure met the needs of the State of Florida, insurance agents, insurance companies, consumers and was acceptable to the secondary mortgage marketplace.

 

Since that date, Demotech has reviewed and rated insurers countrywide.  We have publicly noted how the AOB matter has been problematic to a financial review of insurers in that past history on claims is no longer indicative of future claims activity due to the AOB phenomenon.  The Johnson and Sebo decisions caused further concern about the capability of past loss experience to be indicative of future loss experience.  Given that we have been actively reviewing and rating carriers in Flor8ida since 1996, we have been transparent in our concerns about past being prologue to the future.

 

As carriers assigned an Financial Stability Rating (FSR) one notch below A, S, Substantial have performed well over time, I first approached Fannie and Freddie in April 2012 to accept our FSRs of S or better as opposed to FSRs of A or better.  The S rating is an excellent rating.  In the secondary mortgage marketplace it has been accepted for title underwriters since 1994.  It is accepted by numerous insurance agent’s errors and omissions insurers.  it has withstood the scrutiny of several due diligences.  Since approaching Fannie and Freddie in April 2012, I have had additional communication as recently as February 2, 2017.

 

Carriers assigned an FSR of A must meet or exceed our criteria.   This said, Demotech believes, and others agree, that our FSRs of S, at one notch below A, identify financially stable insurers that are well above average.  As to carriers in Florida, every carrier that we review and rate has been made aware of our opinion on their financial position at least quarterly and since the fall of 2016, on a regular basis.  We have advised carriers of what they need to do to sustain their FSR of A.  However, given the impact of AOB, the potential impact of Johnson (9/29/2016) and Sebo (12/1/2016) on the insurer operating environment in Florida, subsequent to the financial impact of a series of storms during 2016 including Hermione and Matthew, each of the 57 carriers we review may not meet the criteria for an FSR of A when we review their year-end 2016 published reports.

 

In summary, Our criteria associated with an FSR of A remain intact.   One notch below A, an FSR of S is assigned to a well above average company.  We have been communicating with the GSEs and insurance agents errors and omissions insurers since April 2012 on this matter.   We have many E&O carriers on board with the FSR of S.

Update:  “The Treasury Department does not comment on Congressional correspondence,” a spokeswoman said.

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