The property insurance community has divided into two camps after the firestorm that erupted over the potential financial rating downgrades for 17 Florida insurance carriers.

One camp argues that the Demotech rating firm has gone too far, has lumped healthy insurers in with those teetering on the edge of failure, and has used inconsistent criteria to rate the companies. A new rating organization is badly needed for the Florida market, several have said.

The other camp notes that the bad news has been years in the making and that outraged Florida regulators themselves have warned that many carriers are in trouble.

“Why were they surprised?” asked Mark Friedlander, director of corporate communications for the Insurance Information Institute. “A mass ratings downgrade is unprecedented, but it’s not surprising.”

The downgrades were virtually inevitable after the spring session of the Florida Legislature failed to address the insurance problems and a special session in May did not go far enough to rescue companies, to provide enough affordable reinsurance measures and to stem the excessive claims litigation seen in the Sunshine State, Friedlander and others said.

Demotech is simply doing the job that needed to be done, and Florida regulators are guilty of shooting the messenger, critics said.

Meanwhile, the backlash against Demotech, disingenuous or not, has had an impact. The rating firm’s president, Joe Petrelli, said in a statement Monday that ratings due out on July 26 have been delayed while the company conducts further discussions with affected carriers.

“As the current regulatory climate has become hostile and negative and we have and will expend a significant effort creating responses to third-party letters, we will be taking additional time to review information and consider the issues affecting the companies operating in Florida,” the Demotech statement noted.

Petrelli did not say when the ratings will be released but noted that all would be posted at the same time. But significant revisions to the ratings may not happen.

“It is inappropriate to revise potential rating actions in response to unhappiness with the outcomes or threats, including the threat of litigation,” Petrelli said in the statement.

The controversy erupted last week after 17 property insurers received a letter from Demotech, notifying them that their financial strength ratings would soon be changed from “A Exceptional” to “S Substantial” or “M Moderate.” Any rating lower than “A” is not acceptable to secondary mortgage lenders and could mean that millions of Floridians would lose insurance coverage required for mortgaged properties.

The Florida Association of Insurance Agents, Florida’s chief financial officer and the state’s insurance commissioner all responded swiftly. FAIA’s President Kyle Ulrich, in a blog post, questioned Demotech’s motives and urged state leaders and insurers to find another rating method. CFO Jimmy Patronis asked lenders to rethink their use of the firm’s ratings. And Commissioner David Altmaier, in a letter to Demotech, faulted the firm’s methodology and said it had not adhered to consistent standards.

Industry sources said that while some downgrades were expected, pulling the rug from a whopping 17 carriers—a third of the Florida market—was seen as reckless and ham-handed, especially for those insurers that had secured enough reinsurance this year. Demotech has tried for years to get Fannie Mae and Freddie Mac to accept its lower ratings for insurers, and a mass downgrade could be a way to force the lenders’ hands, some speculated.

Regulators may also have been pressured by the governor’s office to raise objections, industry advocates said. And insurance agents, fed up with having to scramble repeatedly in the last year to find new carriers when insurers are downgraded or become insolvent, have raised an outcry.

Petrelli said last week that his intentions had been misconstrued and the regulators’ letters and the FAIA blog were inaccurate. He did not release the names of the 17 companies that received his letter.

Four insurance companies said to be on the list declined to comment to the Insurance Journal. But Frontline Insurance, based in Lake Mary, Fla., told WFLA TV in Tampa that it would not take a downgrade lying down and would appeal the action.

“Rest assured we are in great financial shape, have plenty of reinsurance, and are doing better than our peers,” reads a statement from Frontline CEO Leman Porter. “This is a matter of politics being played out between Demotech and the Florida Legislature, and between Demotech and Fannie Mae/Freddie Mac to get Demotech’s S rating accepted. We unknowingly have gotten caught in the crossfire and will move past this to continue our success in the marketplace shortly.”

Petrelli’s statement Monday did not address Porter’s charges. But others share some of Porter’s frustrations.

After Hurricane Andrew churned through South Florida in 1992, bankrupting some insurers and sending others fleeing the state, Demotech was asked to step in and be the financial rating group for the smaller regional carriers that remained in Florida. But with the recent flap, Demotech has raised more questions than it has answered, said John Rollins, an actuary and former CFO at Olympus Insurance Co., who now oversees capital investments for Evans Insurance Holdings.

Demotech’s letter to the insurers last week makes it sound like it’s hopeless for the 17 carriers and perhaps others in the Florida market, even though some appear to be doing better than others, Rollins said. All insurers have different business models, quota-share arrangements and debt levels.

“In prior reviews of FSRs (financial strength ratings), Demotech has accepted remedies; i.e., capital contributions, revisions to business plans or business models, etc., when a carrier’s reported operating results failed to meet our financial metrics,” Demotech’s letter to the insurers reads. “In these limited cases, our decision to do so anticipated legislative reform(s) to reverse the revisions to the legislative, regulatory, or judicial environment that was the proximate cause of operating results being unfavorable.”

In other words, Demotech previously let companies appeal or show access to additional capital when faced with lowered ratings. Now, though, that’s not feasible, Petrelli seemed to indicate.

“In Florida, the unwillingness or inability of the legislature to address longstanding disparate, disproportionate levels of litigation and increasing claims frequency has resulted in a level of dysfunction that renders our previous accommodation inapplicable,” the Demotech letter said last week.

Rollins responded: “For those of us whose job is to differentiate among existing insurers who are promising versus problematic targets for support (in the form of new capital, management talent and technology), the letter raises the question of whether it is worth it to assemble and fund such improvements,” Rollins said.

He gave this analogy: A classic, 1969 sports car might be worth restoring if it just needs a paint job and minor repairs. “But if it’s a 1982 Yugo, you might just call the salvage yard,” Rollins said.

The big question now is, which type of cars are Florida property insurers driving? “Would Demotech recognize the companies running sound businesses in a tough cycle that just need some runway to be restored to health?” Rollins asked.

In his release Monday, Petrelli said that insinuations by regulators that Demotech is not allowing appeals is inaccurate and the firm has already had discussions with a number of insurance executives.

Another question is, if Demotech has outlived its usefulness, what organization could take up the ratings mantle? Some, including Scott Johnson, a former insurance agent and now a consultant and frequent blogger, have suggested letting Florida State University’s esteemed insurance program set up a rating service. Others have suggested petitioning the AM Best rating firm or the Kroll Bond Rating Agency to review more Florida insurers. The Insurance Journal hopes to explore those options later this week.

This article was originally published by Insurance Journal, Carrier Management’s sister publication.