The Florida insurance market is in a state of flux, as strains from recent years have begun to drive ratings assessments and a situation where capitalisation is key, leading to a number of carrier disposals and a likelihood that both reinsurance capital and private debt will become more in-demand.
Rating specialist Demotech Inc. issued a warning that some Florida insurance carriers are facing serious challenges currently.
These challenges, caused by years of catastrophe losses, loss creep from social inflation, as well as thinly capitalised business model, now means that a number of carriers are expected to face downgrades, while others could be forced to enter run-off if they cannot successfully negotiate a way forwards or attract the capital required to secure their future.
While the cost of reinsurance capital has been one factor that adds pressure to Florida domestic insurance carriers business models, it’s also seen as essential to help them to manage their catastrophe exposures in the state.
In fact, innovative Florida carriers could look to reinsurance capital and perhaps also insurance-linked securities (ILS) structures as a way to help them get through the year ahead and provide the necessary capitalisation certainty to rating agencies such as Demotech, as well as to their backers and shareholders.
Already this year we’ve seen actions from two carriers that have jettisoned parts of their businesses as a response to Demotech’s oversight, as our sister publication Reinsurance News has been reporting.
The first action saw Anchor Property & Casualty Insurance Company selling subsidiary Anchor Specialty Insurance Company to Weston Insurance Holdings Corporation, while at the same time a subsidiary of HCI Group, Homeowners Choice Property & Casualty Insurance Company, acquired the policies of Anchor Property & Casualty Insurance Company.
So Anchor goes into run-off, while its assets are picked up by other specialists in the Florida market.
There is a good chance that Weston and HCI Group both require more reinsurance capacity to support this business on a forward-looking basis, or that they could take our private debt to support it as well.
The second case to come to light so far (there will be more), sees Avatar Partners LP, the parent company of Avatar Property & Casualty Insurance Company, is to acquire both Centauri National Insurance Company (a Louisiana-only focused carrier) and Centauri Specialty Insurance Company (which underwrites across Alabama, Florida, Hawaii, Louisiana, Mississippi, Oklahoma, Massachusetts, South Carolina and Texas).
Again, Avatar may look to bulk up on its reinsurance as a result of the acquisitions, as they provider the company with a broader spread of business in more states.
Avatar has a history in the catastrophe bond market as well, having sponsored the $100 million Casablanca Re Ltd. (Series 2017-1) transaction in 2017, so further cat bond issues could also be in its future and at increased sizes to cover its enlarged portfolio of catastrophe exposed risks.
As insurance investor capital in its more typical forms of private equity and debt has not been flowing as readily into Florida as these strained carriers needed, there appears an opportunity for others to step in with innovative forms of financing to support underwriting of catastrophe exposed business in Florida.
That requires capital from those with an ability to bear the volatility inherent in hurricane exposed property catastrophe risk, but of course that also has to be at the right price.
There have been a number of interesting initiatives over the years that could find traction among stained Florida carriers now and the market may be nearing an inflection point where capital structures become increasingly innovative and important to sustaining the business model of a cat exposed Florida writer.
Among these are ideas such as parametric insurance for insurance carriers.
This is something we saw with Florida headquartered primary insurance company Universal Insurance Holdings back in 2016, when the carrier purchased what it called an “insurance policy” (not reinsurance) to protect its balance-sheet and operations with a source of capital when major hurricanes struck the state.
That was innovative as it was a carrier understanding the need for capital liquidity when major events occurred, rather than purely relying on indemnity reinsurance protection. Something that could be important to more thinly capitalised Florida carriers going forwards.
There’s also a chance we see more Florida focused reinsurance sidecars this year, as well as private arrangements between Florida carriers and collateralized reinsurance markets to secure more capacity that is supportive of their underwriting, rather than just pure reinsurance protection.
Private debt is the other angle, where some ILS funds may have an opportunity to support the businesses of Florida carriers across more of the balance-sheet than just the reinsurance angle alone.
These strains are not just being felt in Florida, we understand, with smaller carriers and those lacking capital set to also struggle when rating agencies come calling in other catastrophe exposed states of the U.S.
The actions being taken by the Florida focused carriers provide a sign of how the U.S. cat exposed primary market may seek to shore up its future, in an effort to ward off downgrades it seems any actions may be taken.
All of which should present opportunities for ILS and reinsurance capital providers to become even larger supporters of business in the state.
One final point is that some ILS fund players that work with MGA’s could also take this opportunity to bid on portfolios of coastal risk, to help under-pressure primary carriers.
That could be an opportunity for the likes of Nephila Capital, as the selling off of Florida property insurance business may see some better quality risks coming to market than have been seen for years through the de-population program of Citizens.