After seven years without a landfall, Florida homeowners insurers are entering into the upcoming hurricane season with some stockpiled surplus, an insurer of last resort shedding policies into the private market and additional capital in the reinsurance market.
At the end of April, Citizens Property Insurance Corp., the state-backed residual market insurer, had about 175,000 fewer policies than it did a year ago with many of those leaving for the private market through the depopulation program. Citizens Chief Financial Officer Sharon Binnun said there's a potential for up 70,000 more policies to leave Citizens books by this summer.
"With Citizens looking to depopulate, that's giving some primary insurers more of an opportunity and as a result there's probably a greater need for reinsurance capacity," said Robert DeRose, an A.M. Best Co. vice president in the property/casualty ratings division. "There is a lot of capital that has flown into the reinsurance sector either through collateralized vehicles or a few startups backed by hedge funds."
Indications for the reinsurance July renewal period show that upward pricing pressure is relenting because of the additional capital, DeRose said, but the Florida market is still one of the best opportunities from a reinsurance standpoint. Florida's relatively quiet weather experience doesn't mean reinsurers should ease their underwriting standards, he said.
"I think that reinsurers need to continue to be disciplined and they need to make sure they are getting an adequate price for the risk that they're taking," DeRose said. "If they can't do that they are probably justified in walking away or holding their capacity back, because ultimately there will be a loss."
Citizens, which is Florida's largest homeowners insurer, has been able to broker better prices for its reinsurance program in recent years, Binnun said. For the upcoming season, Citizens was about to negotiate prices similar to last year, but with lower attachment points. The jump in reinsurance protection came with the placement of a two-year $750 million Everglades Re cat bond. There was also a subsequent $250 million three-year offering.
As Citizens grew over the past seven years it has been able to bank more premiums into its surplus while working to reduce its size and exposure, Binnun said.
"That would not be a smart plan to try and time the market that way, so that was luck," Binnun said. "We've offloaded a lot of risk and we get to keep the surplus we've built. We know the wind will blow. When? We don't know."
Private insurers have benefitted from the dearth of hurricane losses and built surplus, but not to the levels expected from seven years of hurricane-free weather, said Sam Miller, executive vice president of the Florida Insurance Council. That's because of large all-other-peril type losses, including sinkhole claims and non-flood water damage, Miller said. Florida homeowners rates have been increasing because of the all-other-peril losses, Miller said anecdotally. He said there are some bright spots about the market heading into the storm season.
"The (Florida Hurricane) Cat Fund has the most cash that it's had, maybe ever, but certainly since 2004," Miller said. "The Cat Fund and Citizens' high risk account, which is wind only, have been able to build significant surplus during the hiatus of hurricanes, because that's the only type of loss they cover."
Eight of the top 10 writers of homeowners insurance in Florida are Florida-only or Florida-majority writers, according to BestLink, A.M. Best Co.'s online financial system. Six of those companies saw surpluses rise from 2011 to 2012, while one slightly declined and complete information was not available for another.
The benefit from the seven years without a landfall shows in the state's homeowners loss ratios. From 2006 to 2012, the market booked an average adjusted loss ratio of 33.37, according to BestLink. However, in 2005 the average ratio was 136.63 and in 2004 it was 278.83. During those two years Florida was damaged by seven hurricanes, according to the National Oceanic and Atmospheric Administration.
This is the longest stretch Florida has seen between events for at least the past 100 years. The three longest stretches prior to this one were from 1979 to 1985; 1987 to 1992; and 1999 to 2004, according to AIR Worldwide's hurricane expert, Tim Doggett, citing the Atlantic basin hurricane database. He said not all events listed in the database are direct hits to Florida and might be collateral damage from other hurricanes.
Miller said this string of luck cannot continue forever. "A category 4 or 5 will create serious challenges for us," he said. "We're prepared, we're not as prepared as we could be, but we are probably better prepared than any other state."