Joseph Petrelli, president co-founder of the Ohio-based property insurance rating agency Demotech, Inc., says it’s highly unlikely the company will take on new clients in Florida given the state’s troubled insurance marketplace and because of the political backlash it faced over its processes this summer.
Petrelli, in an interview Friday, says that the condition of the state’s insurance marketplace is untenable, citing what he sees as the difficulties insurers in Florida are facing from an onslaught of litigation and little interest from leaders to correct the problems.
“We’re going to support the companies we currently work with, but we have extremely limited interest in adding additional companies in Florida to our to our portfolio of companies,” he says.
Demotech rates about 470 companies nationwide, about 30 of those are in Florida. It was founded in 1985 and, provides “independent financial stability ratings for property and casualty insurance companies, title underwriters, and other risk-bearing entities.”
Petrelli, in a follow up email, would not commit to saying the company would completely cease taking on new clients in Florida, but added that “we have an extremely limited appetite for additional business.”
While he initially blamed the state of the marketplace for the decision, he quickly added that a political dustup this summer contributed to the company’s decision to effectively pull out of Florida.
The political problem started in July when Demotech privately informed 17 carriers that they faced being downgraded and would be unable to write policies in the state. As is customary, the companies were asked to submit additional paperwork to continue the rating process.
Petrelli says this is a common practice but this time it became a political issue. He contends Gov. Ron DeSantis, Florida’s CFO Jimmy Patronis and Florida’s insurance commissioner David Altmaier attacked Demotech to score points.
“I’ll be honest with you, I don’t crash parties I’m not invited to,” he says. “And it’s apparent that the state of Florida does not want us in the state of Florida. So, we’re not interested in crashing a party.”
In far-ranging interview Friday morning, Petrelli talked about the bleak future for Florida’s battered property insurance marketplace and his company’s role in it. The interview started as a discussion about how Demotech’s rating process and quickly devolved, as conversations about Florida’s property insurance market often do, into a discussion about what ails the system and what needs to be done to fix it.
Several times during the interview, Petrelli, in a curt and no-nonsense tone and terms, laid much of the blame on a legal system that allows lawyers to file claims and incentivizes them to continue pushing them. But, citing the political backlash he faced earlier this year, he declined to offer any advice to legislators set to gather Dec. 12 for a second special session this year to address property insurance problems.
Of the 17 companies that led to an uproar, Petrelli says three were downgraded, “several companies consolidated multiple affiliates into a single insurer to avoid downgrades, several carriers withdrew from our interactive process rather than accept a lower rating” and those that avoided a downgrade infused capital, revised their business model or provided material non-public information to us.”
The conversation has been edited.
How concerned are you for the future of the insurance marketplace in Florida?
“(State) Senator Jeff Brandes has said we treated the residential property insurance marketplace in Florida as if it had the flu. It has stage four cancer. And I think that comment by Senator Brandis is very accurate.”
Can you explain how a company that’s gotten an exceptional A rating based on their final financial strength can become insolvent within a few months?
We did a self-analysis of the companies that had that phenomenon that you just described. Because of the level of litigation being disproportionate and disparate, we have seen companies litigated to death. And they have been targeted. California is the fifth largest economy in the world. They have a $12 billion — with a B — homeowners insurance market. In 2021, there were 3,500 litigations in a $12 billion market.
There are companies in Florida, with a tiny sliver of Florida, that have had 4,000 and 5,000 claims in one year. And the opportunists, target those companies. And we have internet-based evidence, technology-based evidence that shows that companies have gone from three, four, five lawsuits a month to 500 lawsuits a month. Almost overnight. The opportunists in Florida can actually turn on the jets and go from three, four, five litigations a month to hundreds of litigations a month thereby destroying what would have been a very solid company by bringing a level of litigation against one company in Florida that exceeds the number of claims in the entire state of California. And we’ve got the data, we’ve got the research. It’s just absolutely an opportunist’s world when it comes to litigation in Florida.
What factors does Demotech consider when reviewing and rating the financial condition of a Florida insurance company?
I think most of them are comparable to our national standards, and I think the difference for Florida, or any catastrophe prone state, would be reinsurance. We do look at the adequacy of rates because I think that factors into the company’s ability to operate profitably. We also look at the composition of the investment portfolio to make sure the company has liquid assets that are readily available to pay claims. We’ll also look at the adequacy of the company’s loss and loss adjustment expense reserves.
All insurance companies are required to carry at least what the National Association of Insurance Commissioners calls reasonable loss and loss adjustment expense reserves. What that typically means is that the loss reserves are within the actuaries high and low in their range. We prefer adequate loss and loss adjustment expense reserves, which is a higher standard. We also look at the cash and invested assets of the company as a percentage of its total liabilities. So, you can think of a fraction where you have cash and invested assets on top, the total liabilities of the company on the bottom. And you certainly want that to be at about 100% so that if for some reason every liability of the company came due today, they would have enough cash invested assets to pay that. And the catastrophe piece would be Florida specific.
The other thing we look at is the company’s maximum retention. For a company, their retention is the same as you and I have a deductible on our policy. So, in the event of a storm, like with Ian or Nicole, companies would have a maximum net retention that they pay and then their reinsurance kicks in. For Demotech rated companies, that’s no more than 10% of surplus on a pre tax basis. If there was a storm, the company’s surplus net worth would decrease 10%. The second storm, another 10%, maximum, and then they have to have reinsurance above that dollar amount. The same way that you and I might have $500 deductible, $1,000 deductible, whatever it is, that’s our maximum out of pocket.
Earlier this year, Demotech indicated it would downgrade several insurance carriers in Florida. What process or methodology does the company use when making these kinds of decisions?
We use the same methodology in Florida that we use in every other state where we’re in touch with most companies at least six times a year, probably 10 or 12 if it’s Florida. And we’ve been in touch with them exactly the same way since July of 1996 when Florida asked us to review and rate insurance companies. The process is a review of the company’s operating results — whether or not they’ve been profitable, whether or not their reserves appear to be adequate, whether or not their liquidity ratio appears to be sufficient, whether or not their catastrophe reinsurance program appears to be adequate and remains fully in place. And I think when we looked at some of the operating results, in the late spring, early summer, we did send some companies a note indicating we saw some issues that indicated to us that they were not at the A level or above. And that we wanted to have a serious discussion about how they were going to remedy that situation or what their thoughts were. And we applied the ones that we discussed briefly, leverage ratios, adequacy of premiums, adequacy of reserves, liquidity ratios and those are just a few. (We used) methodology that we had in place for 26 years in Florida, and 33 years countrywide.
Can you walk us through, from your end, how this normal process of doing business turned into to this political controversy?
I’ll be quite candid. I don’t know how that happened because we utilized the very same procedure this summer that we have virtually every quarter for the last 26 years. From our perspective, if you think of 26 years on a quarterly basis, that is 104 times that we did what we did. And for whatever reason, the 105th time it became a political issue. I’ll be honest with you, we were attacked by the commissioner, the CFO, a press release from the governor’s office. That happened. It is what it is. They came after us. And I don’t know why.
Will that change anything? Are you going to continue doing what you’ve always done?
We will not be intimidated. We’re independent. We’re independent of everyone and we continued our procedure. I will say this, I did make a decision this morning and you will be the first to know outside of Demotech, we have extremely limited interest in adding additional companies in Florida. We’re going to support the companies we currently work with, but we have extremely limited interest in adding additional companies in Florida to our portfolio of companies.
Is that in response to what happened this summer?
No. It’s a response to the current residential property insurance marketplace conditions in Florida. And, you know what, you’re right. A little bit, a little bit to what happened in Florida with everyone else. Yeah, I mean, I’ll be honest with you, I don’t crash parties I’m not invited to. And it’s apparent that the state of Florida does not want us in the state of Florida. So, we’re not interested in crashing a party. But it’s market conditions, first and foremost, which are, we think, close to unsustainable. We’ll support the companies that we think can withstand those market conditions, but we have extremely limited interest in adding additional companies in Florida. We have 30-something companies in Florida right now, we’re certainly going to continue to review and rate them.
Given your unique position, do you have any suggestions on what legislative fixes should be part of the special session in December? Or General session in the spring?
We, in March of this year, we were actually the first to request a special session publicly after the Legislature adjourned on March 13. And I think that got some traction and they did have a special session at the end of May. And they did some things effective July 1. And then, later in July, we were skewered by the governor and the commissioner and the CFO. So we are out of the prognostication business, sir. We wish everyone well. We wish the Legislature, the House and the Senate and everyone else good luck. And we’re hopeful that they would institute the type of reforms that are necessary to address (that) 80% of the country’s residential homeowners litigation is emanating from 8% of claims in Florida. That disproportionality is what I hope that they are in the process of addressing.
What are the cost drivers impacting insurance rates in Florida?
Let’s just talk about homeowners insurance in general. There’s nothing associated with homeowners insurance going down. I think homeowners insurance rates countrywide, are headed up. If you look at tarpaper, shingles, paint, rugs, wood, glass, all the things that one would need to make repairs in a home, copper tubing for plumbing, whatever it might be, everything’s going up. The hourly rate of the person who comes to do the work, the cost of the person’s vehicle when they come to do the work, the cost of the person’s benefits when it comes to do the work. I personally, as an actuary, believe there is no driver that is moving homeowners insurance down. All but impossible. That being said, let’s transition to Florida. Florida has the additional impact of catastrophic losses from wind events. I think litigation is certainly a driver, an additional driver in Florida.
Louis Llovio is the commercial real estate editor at the Business Observer. Before going to work at the Observer, the longtime business writer worked at the Richmond Times-Dispatch, Maryland Daily Record and for the Baltimore Sun Media Group. He lives in Tampa.