Florida's homeowners' market has always been about direpredictions or celebratory resurrections. Hurricane seasons such asthose of 2004 and 2005, which saw eight hurricanes impact the stateat a cost of $37 billion, naturally make insurers wary of placingtheir capital in the state. But the industry has always had a shortmemory; it only takes a few years without storms before executivesin boardrooms around the state and country decide to return to themarket. After all, even though Florida is at greater risk forhurricane losses than other states, it is still the land of plenty.The market is large, diverse, and lucrative, even with the currentpressure to reduce rates.

Right now, there are several important factors that favorinsurers that are looking to invest in the market. For one,insurers are taking advantage of a private reinsurance market thathas plenty of capacity, which has led to a significant decrease inreinsurance premiums. And then there are the steps taken by thestate to encourage investors to enter the market. Lawmakers doubledthe Florida Hurricane Catastrophe Fund's single-season capacityfrom $16 billion to $28 billion and offered additional coverage atprices well below the private market.

Then there was the creation of the Capital Build-Up Program thatoffers up to $25 million in matching funds to any company willingto write business in the state. Thirteen carriers have takenadvantage of the program, and they are offering policies tohomeowners, mobile homeowners, and condominium units in everycounty around the state. The plan is one reason why the CitizensProperty Insurance Corporation's population has remained stable ataround 1.25 million policies, despite lawmakers rolling back ratesto make it competitive with the private market.

These factors taken as a whole has led to a resurgence of thedomestic market. But even as agents are “covered up with markets,”according to Florida Association of Insurance Agents President JeffGrady, there are a few lingering questions. Where is this newcapital coming from and who is operating these companies? Do thesecompanies represent a long-term investment in the market, or arethey just creating another bubble that will burst when the firstmajor wind blows? These questions remain unanswered for now. Butthere is no doubt that these domestic insurers are making theirpresence felt in the state.

A Land of Opportunity

One reason for the resurgence of the domestic market is the voidcreated by the decisions of large companies to stop writing newbusiness and reducing their exposures.

State Farm Florida Insurance Co., the state's second-largestinsurer with one million policyholders, recently announced that itwas dropping 50,000 policyholders located in coastal counties. Thecarrier hasn't written any new business on the coast for years, buthad typically renewed existing policyholders. The announcement cameafter the carrier indicated it would stop writing business in thestate in response to its inability to secure significant rateincreases.

Allstate's woes are well documented. Allstate Insurance Group,which is made up of five companies, has 330,000 policies around thestate, 241,000 of which are covered by Allstate Florida InsuranceCo. After filing for double-digit rate hikes, the company has beencaught up in a battle with regulators over the use of hurricane andcomputer models, reinsurance costs, and its rates in general.Recently, Insurance Commissioner Kevin McCarty pulled the insurer'scertificate of authority, based on what he described as thecarrier's unwillingness to comply with a subpoena to producecertain documents.

Nationwide Insurance Company of Florida, with 204,000policyholders, has likewise closed its doors to new business. Andthis trend of large companies either retreating from the market orjust holding their own is likely to continue. Last year's propertybill specifically prohibited large national companies from formingFlorida-only subsidiaries to isolate their Florida exposure. Theso-called pup companies were once viewed as a key to keeping largenational carriers in the market, but they have become a point ofcontroversy due to concerns by regulators over the businessrelationships between the mainline carriers and theirsubsidiaries.

This decision, along with others taken to rein in rates, makesit highly unlikely that the national carriers are going to startdumping cash into the state in the foreseeable future. Under normalcircumstances, this would have meant that more pressure would havebeen placed on Citizens to accommodate more policyholders. Instead,it has created an opening for the domestic market, which comes witha big assist from the state.

The Capital Build-Up Program

The Capital Build-Up Incentive Program is part of the packagepassed last year, which in combination with the expanded Cat Fund,is designed to attract investors to the state. Lawmakersappropriated $250 million for the incentive program, which providesmatching funds for investors who are willing to enter the market.Under the plan, any insurer or insurance group can secure a surplusnote from the state to help capitalize a new company that covershomeowners and individuals living in manufactured homes.

In order to qualify for the program, investors are required tomeet certain criteria. First, the insurer's total financialresources must reach $50 million, including the surplus note, newcapital, and prior surpluses. For insurers looking to covermanufactured homes, the amount of capital must equal $14 million,$7 million of which can be derived from a surplus note. The insurermust commit to maintaining a minimum premium-to-surplus ratio of2:1, and the surplus note itself must be paid back to the stateover a 20-year period, with the provision that during the firstthree years carriers only have to pay the interest on the bond.

How successful is the program? Thirteen companies have takenadvantage of the relatively inexpensive surplus notes, which whencombined with matching funds, represents more than 500 million innew capital for the state. That new capital has translated intomore private market coverage for policyholders.

For example, St. John's Insurance received a $20 million surplusnote after investors raised $20 million. The insurer now has morethan 300,000 policies in force. Florida Peninsula Insurance, Co.,has 310,000 policyholders after investors raised $25 million toqualify for a matching surplus note. All told, the 13 companiesaccount for more than 1.7 million policies.

The new companies are as follows:

American Capital Assurance Corporation: 67,000 policies.

American Integrity Insurance Co., of Florida: 149,000policies.

Cypress Property and Casualty: 95,000 policies.

First Home Insurance Co.: 59,600 policies.

Florida Peninsula Insurance Co.: 310,000 policies.

Modern USA: 59,000 policies.

Olympus Insurance Co.: 125,000 policies.

Privilege Underwriters Reciprocal Exchange: 3,500 policies.

Royal Palm Insurance Co.: 147,000 policies.

Southern Fidelity Insurance Co.: 86,000 policies.

St. John's Insurance Co.: 322,000 policies.

United Property and Casualty: 142,000 policies.

Universal Property and Casualty: 150,000 policies.

Insurance Commissioner Kevin McCarty said the results of theprogram show that there is still plenty of interest in the state'smarket. “I think the capital build-up incentive was an innovativeway to recruit private capital back to Florida,” he said. “Giventhe size of the state's market, it's hard to ignore.”

Rich Fidei, a partner with the Colodny, Fass, Talenfeld,Karlinsky & Abate law firm, said that the surplus notes haveproven attractive to investors who view Florida's diverse market asan opportunity to earn a decent rate of return on their money.

“There has been steady growth over the last couple of years asthe large companies moved out, which has created new openings inthe market,” said Fidei, who has worked with some of the newcompanies.

He said it is a trend that is unlikely to change anytime in thenear future as more investors and companies are looking for ways toenter the market.

“There are more in the pipeline moving forward, even thoughthere are inherent risks such as hurricanes,” he said. “But I don'tsee that stopping investors unless the prospects change.”

Questions Raised

Taken at face value, the influx of new capital, new companies,and their long reach over the property market would seem to have noapparent downside. From Governor Charlie Crist's point of view aswell as the lawmakers who rewrote the property insurance laws lastyear, the capital build-up program is a matter of vindication thatshows even with low rates and a competitive state fund, there arestill plenty of investors willing to line up and write homeowners'coverage. As a result, the legislature is likely to refill theprogram's coffers this year to attract even more new companies.

Still, just as any “boom” in the economy carries with it thepossibility it will eventually expand beyond what the fundamentalscan support, so is the case with insurance. Much of the industry'scourse can be charted over these boom and bust cycles. Companiesenter a competitive market in which the demand for coverage ishigh, and they earn healthy profits initially. But they eventuallybecome financially crippled as the pursuit of marketshare drivesdown prices to levels that cannot sustain losses. In most lines ofinsurance, the process of earning profits followed by a period oflosses is something that occurs over time. When it comes tohomeowners' insurance and hurricanes in Florida, though, it canhappen in a day.

One of the factors charting the course of these new companies iswhere the new capital is coming from. Fidei said the investorsrepresent a variety of different private interests, including hedgefunds. These are investors who traditionally have not been in theinsurance market and are not as familiar with the financialframework that sustains long-term companies. New investors alsomean new expectations and new ways of deriving income.

Grady said that agents are benefiting by the re-emergence of thedomestic market and the competition it has brought to the state.However, he said agents are worried about some of the dynamics thatare forming the financial structure of the market. For example, hesaid that many new companies seem intent on making money throughpolicy administration fees. In addition to forming a new insurer,investors form a managing general agency or policyholderadministration option that receives a cut of premiums perpolicy.

This is one way that companies can earn additional money thatcould offset lower premium earnings due to low rates. But the keyto earning money in this manner is that it requires a high volumeof policies, which accounts in part for the pursuit of marketshare.Grady said that some companies have become so aggressive in theirpursuit of marketshare that they are offering premiums at almostunheard-of levels. “Some of the rates seem to defy logic,” he said.“We are talking 20 percent to 30 percent below Citizens'rates.”

All of this is not lost on McCarty. He said the Office ofInsurance Regulation is working closely with the new companies. Hesaid it would take time for them to mature and learn thecomplexities of working within Florida's intricate market. “Myconcern is that there have been so many new companies, they haven'tbeen able to recruit the level of expertise needed at an executivelevel,” he said.