Florida's homeowners' market has always been about dire predictions or celebratory resurrections. Hurricane seasons such as those of 2004 and 2005, which saw eight hurricanes impact the state at a cost of $37 billion, naturally make insurers wary of placing their capital in the state. But the industry has always had a short memory; it only takes a few years without storms before executives in boardrooms around the state and country decide to return to the market. After all, even though Florida is at greater risk for hurricane losses than other states, it is still the land of plenty. The market is large, diverse, and lucrative, even with the current pressure to reduce rates.

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

Then there was the creation of the Capital Build-Up Program that offers up to $25 million in matching funds to any company willing to write business in the state. Thirteen carriers have taken advantage of the program, and they are offering policies to homeowners, mobile homeowners, and condominium units in every county around the state. The plan is one reason why the Citizens Property Insurance Corporation's population has remained stable at around 1.25 million policies, despite lawmakers rolling back rates to make it competitive with the private market.

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

A Land of Opportunity

One reason for the resurgence of the domestic market is the void created by the decisions of large companies to stop writing new business and reducing their exposures.

State Farm Florida Insurance Co., the state's second-largest insurer with one million policyholders, recently announced that it was dropping 50,000 policyholders located in coastal counties. The carrier hasn't written any new business on the coast for years, but had typically renewed existing policyholders. The announcement came after the carrier indicated it would stop writing business in the state in response to its inability to secure significant rate increases.

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

Nationwide Insurance Company of Florida, with 204,000 policyholders, has likewise closed its doors to new business. And this trend of large companies either retreating from the market or just holding their own is likely to continue. Last year's property bill specifically prohibited large national companies from forming Florida-only subsidiaries to isolate their Florida exposure. The so-called pup companies were once viewed as a key to keeping large national carriers in the market, but they have become a point of controversy due to concerns by regulators over the business relationships between the mainline carriers and their subsidiaries.

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

The Capital Build-Up Program

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

In order to qualify for the program, investors are required to meet certain criteria. First, the insurer's total financial resources must reach $50 million, including the surplus note, new capital, and prior surpluses. For insurers looking to cover manufactured homes, the amount of capital must equal $14 million, $7 million of which can be derived from a surplus note. The insurer must commit to maintaining a minimum premium-to-surplus ratio of 2:1, and the surplus note itself must be paid back to the state over a 20-year period, with the provision that during the first three years carriers only have to pay the interest on the bond.

How successful is the program? Thirteen companies have taken advantage of the relatively inexpensive surplus notes, which when combined with matching funds, represents more than 500 million in new capital for the state. That new capital has translated into more private market coverage for policyholders.

For example, St. John's Insurance received a $20 million surplus note after investors raised $20 million. The insurer now has more than 300,000 policies in force. Florida Peninsula Insurance, Co., has 310,000 policyholders after investors raised $25 million to qualify for a matching surplus note. All told, the 13 companies account 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: 149,000 policies.

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 the program show that there is still plenty of interest in the state's market. “I think the capital build-up incentive was an innovative way to recruit private capital back to Florida,” he said. “Given the 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 have proven attractive to investors who view Florida's diverse market as an opportunity to earn a decent rate of return on their money.

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

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

“There are more in the pipeline moving forward, even though there are inherent risks such as hurricanes,” he said. “But I don't see 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 no apparent downside. From Governor Charlie Crist's point of view as well as the lawmakers who rewrote the property insurance laws last year, the capital build-up program is a matter of vindication that shows even with low rates and a competitive state fund, there are still plenty of investors willing to line up and write homeowners' coverage. As a result, the legislature is likely to refill the program's coffers this year to attract even more new companies.

Still, just as any “boom” in the economy carries with it the possibility it will eventually expand beyond what the fundamentals can support, so is the case with insurance. Much of the industry's course can be charted over these boom and bust cycles. Companies enter a competitive market in which the demand for coverage is high, and they earn healthy profits initially. But they eventually become financially crippled as the pursuit of marketshare drives down prices to levels that cannot sustain losses. In most lines of insurance, the process of earning profits followed by a period of losses is something that occurs over time. When it comes to homeowners' insurance and hurricanes in Florida, though, it can happen in a day.

One of the factors charting the course of these new companies is where the new capital is coming from. Fidei said the investors represent a variety of different private interests, including hedge funds. These are investors who traditionally have not been in the insurance market and are not as familiar with the financial framework that sustains long-term companies. New investors also mean new expectations and new ways of deriving income.

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

This is one way that companies can earn additional money that could offset lower premium earnings due to low rates. But the key to earning money in this manner is that it requires a high volume of policies, which accounts in part for the pursuit of marketshare. Grady said that some companies have become so aggressive in their pursuit of marketshare that they are offering premiums at almost unheard-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 of Insurance Regulation is working closely with the new companies. He said it would take time for them to mature and learn the complexities of working within Florida's intricate market. “My concern is that there have been so many new companies, they haven't been able to recruit the level of expertise needed at an executive level,” he said.

Special Reports /

New Capital, New Choices: The Domestic Homeowners' Market Rises

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