Florida homeowners market: back from the abyss?

After several brutal years of mounting losses, corporate failures, soaring reinsurance costs and rampant litigation, the once bleak outlook for the Florida homeowners market looks brighter following game-changing legislative reforms that have spurred what looks to be a return of reinsurer appetite.

There are signs that capital is beginning to return to the sector with a number of domestic admitted start-up carriers and E&S players either already live or in the works, in contrast to the backdrop of broader retrenchment by larger insurance companies from cat-exposed homeowners business in the US.

That retrenchment has, of course, included further pullbacks by nationwide carriers such as Farmers, which said it will no longer offer own-branded auto, home and umbrella policies in the state.

But another US personal lines giant, State Farm, said it sees more opportunity in Florida thanks to the recent insurance reforms.

And after the policy count of state-backed Citizens Property Insurance Corporation returned to near-record levels this year at around 1.3 million – a sure indicator of the recent challenges facing the private market as it sheds business – depopulation activity is finally picking up, with takeouts sought by start-ups and incumbents among the group of domestic Florida carriers.

Last month, the Florida Office of Insurance Regulation (FLOIR) approved Texas-based carrier Mainsail Insurance Company as an authorised P&C domestic insurer in the Sunshine State.

It then also approved a duo of carriers from recently converted full-stack insurer Orion180.

The Hippo-owned company and Orion180 carriers are the second, third and fourth to be approved by the regulator since the passage of the key HB 837 tort reform legislation this March, which followed sweeping property insurance reform in December last year.

That legislation repealed one-way attorney fees for property insurance claims and eliminated the controversial practice of assignment of benefits, which had been the scourge of the sector in recent years.

The first start-up domestic approved following HB 837 was HCI Group’s Tailrow, which was given the green light in April.

And Paresh Patel, CEO of HCI Group – for some time an outperformer even during the recent Florida market woes – was among public company leaders giving an increasingly bullish view on the Sunshine State’s homeowners market during the Q2 earnings season.

He told investors that the carrier is now back in growth mode in Florida as it sees evidence of the legislative reforms taking effect.

The company’s consolidated gross loss ratio dropped to 34 percent in the second quarter from 47.9 percent in Q2 2022, which CFO James Harmworth said was down to lower claim frequency, flattening claim severity, lower litigation frequency and higher average premium per policy.

“The profitability of the business has improved considerably … we now have a healthy stable business. We can now look to the future and the obvious thing to do is to expand and grow the business, especially in Florida, and that is exactly what we plan to do,” said CEO Patel.

There are a number of other start-ups understood to be in the pipeline, including the Village Protection Insurance vehicle linked with former Guy Carpenter executive Kevin Stokes that is expected to pursue Citizens takeouts following a successful launch.

Recent start-up reciprocal Loggerhead has been active in depopulation this year and momentum appears to be gathering for takeouts, with the FLOIR having greenlit 280,000 policies to be taken out of Citizens through to October 2023.

Mid-year unexpectedly orderly

With the exception of 2022 entrants Slide and Vyrd, start-ups had been largely waiting on the sidelines as capital was reluctant to enter amid concerns over the availability of reinsurance.

But those dynamics now appear to have changed.

HCI Group’s Patel said the shift in the reinsurance market seen at the mid-year renewal had been a factor in his company successfully getting its placement home.

“The uncertainty around the availability and affordability of reinsurance is now behind us with the placement of our 2023 reinsurance program,” he said.

The executive noted that at the start of the year there was uncertainty in the market about the availability and affordability of reinsurance.

As previously reported, the concerns were based on the major shift in reinsurer behaviour more broadly seen at 1 January as the market dramatically hardened, and Florida-specific factors with Hurricane Ian also fresh in the memory.

Fast forward a few months and it is all change, however.

“I think the anxiety level amongst reinsurers – at least in Florida – seems to have abated … I think lots of reinsurance availability is now starting to normalise,” he suggested.

HCI Group was not alone among Florida’s slimmed-down trio of New York-listed homeowners writers in describing a smoother renewal experience.

Universal Insurance CEO Stephen Donaghy said his company was able to secure consistent terms, conditions and coverage as last year, but was also able to reduce its consolidated retention and ceded premium ratio.

Elsewhere, a raft of other Florida carriers such as relatively recent arrivals Vyrd and Slide along with more seasoned companies such as Security First and Tower Hill (albeit with its new reciprocal vehicle) reported successful renewals in many cases completed ahead of time.

Among them was Security First, whose chairman and CEO Locke Burt told this publication: “The legislative changes were transformational and we had a number of reinsurers who recognised that.”

After the trauma of the 2022 Florida renewal – disrupted by a special session of the Florida legislature and the Demotech downgrade warning saga – reinsurance brokers were able to enjoy a relatively relaxed placement process this year.

Reinsurer appetite returns

A big factor in the more orderly market that ensued was the strong appetite shown by a number of reinsurers, including Berkshire Hathaway, DE Shaw, Arch and Ariel Re, as fears of a capacity crunch that had been very real only a few months earlier dissipated.

Their interest was drawn by sky-high rates on line available on layers below the Florida Hurricane Catastrophe Fund and significant increases higher up towers.

A number of reinsurers are understood to have come in and deployed capacity, providing cornerstone capacity to Florida buyers on several deals that put them in a much stronger position to fill out the rest of their placements.

Dynamics eased to such an extent that there was even anecdotal evidence that one of the largest buyers of Florida cat capacity pulled its firm order terms late on and repriced them 10 percent lower because of the high level of capacity seeking participation.

Pricing was so good on low-attaching layers – in some cases with rates on line in excess of 100 percent on a prepaid reinstatement basis – that reinsurers are in a position where they can’t lose money unless there is a second hurricane.

As well as increased supply for XoL placements, there is also evidence of more capacity than expected targeting quota shares of better-quality Florida homeowners insurers, with Berkshire Hathaway and DE Shaw both mentioned in dispatches for their appetite to participate.

This renewed interest from reinsurers came at a price, however. This publication put a consensus number out in the 30 to 40 percent up range just ahead of 1 June – a range that was in line with that subsequently published by Gallagher Re.

Some, of course, fell outside that range. Citizens, which was able to secure a $1bn line from Berkshire Hathaway and a 68 percent increase in Nephila’s participation, said it paid a risk-adjusted price increase of around 25 percent for 2023 placed limit across its coastal and personal lines accounts.

Another factor in the renewal was the readily available supply of cat bond capacity that was utilised by several Florida domestic carriers in their structures.

Commenting on her experience of the renewal, Security First president Melissa Burt DeVriese told this publication that behaviourally there were three groups of reinsurers at the renewal.

“You have some reinsurers that see it as a market opportunity and have been looking to grow; then you have opportunistic reinsurers that are charging high prices – often with terms and conditions that in the past would not have been considered; and then there are some large players that have really pulled back,” she said.

If positive momentum continues in the Florida homeowners insurance market, incumbent domestic carriers and start-ups will be increasingly confident that opportunistic reinsurance supply will evolve to a stable and sustainable buying environment.