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Florida-based FedNat Insurance Co., six months after it pulled out of other states to concentrate on Florida, woke up to some potentially bad news on Good Friday.

The Demotech financial rating firm announced it has downgraded FedNat's financial stability rating from "A exceptional" to "S Substantial." The rating indicates that the Sunrise, Florida-based insurer still has substantial resources and stability, and is not in imminent danger of collapse, according to Demotech President Joe Petrelli.

But many mortgage lenders won't accept less than an exceptional rating. An "S" rating is not recognized by Fannie Mae and Freddie Mac, the government-sponsored purchasers of mortgages.

"That's a big deal, really," one Florida insurance executive said Monday. "The whole homeowners' market exists because of mortgage lending."

"Our 'S' rating is a pretty decent rating," Petrelli said. But he agreed that if primary lenders won't accept it, "that could cause FedNat some issues going forward," he added. "And it might complicate their reinsurance situation."

Petrelli said the downgrade came partly as a result of losses in Louisiana and Texas, after a massive winter storm and Hurricane Ida in 2021. Demotech's financial data also shows that FedNat had adequate reserves in only one of the last five...

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