A Game of Risk for Small Insurers
Small, Florida-based insurers are snagging market share -- but are they the solution to reinvigorating the state's home insurance market?
‘Domestic’ insurers — Florida-based companies that generally only do business here — now have more than a third of the state’s home insurance market. Combined profits at John Auer’s companies, American Strategic and ASI Assurance, topped $40 million in 2007. [Photo: Mark Wemple]
American Strategic Insurance, a young Florida home insurance company, did more than just survive the 2004 and 2005 hurricane seasons that sank other insurers and kicked the crutches from under Florida’s crippled property insurance market. The St. Petersburg-based insurer lost only $1.5 million in the first storm year and turned a $3.2-million profit in the second.
Meanwhile, as overexposed State insurance news Farm and Allstate shed Florida policies, American Strategic was growing — to 257,000 policies. As hurricane season opens, the 11-year-old group says it’s fortified for trouble, structured financially to withstand a cataclysmic 1-in-250 year storm. By contrast, Florida’s largest insurer, state-subsidized Citizens Property, as of April had the underpinnings to withstand only a much smaller storm: Anything larger than a 1-in-68 year event means Citizens will need to levy charges on the policyholders of all Florida insurance companies.
American Strategic is in a growing class of companies known as domestic insurers. Formed under Florida law and founded in the main by Florida entrepreneurs, most domestics are less than a decade old and generally only do business here — a state-specific orientation almost unique to Florida. The cadre of domestics has grown rapidly and now holds 34% of the Florida market. One, Fort Lauderdale-based Universal Property & Casualty, has become Florida’s fourth-largest insurer, with more market share in Florida than Nationwide and USAA.
The advent of the domestics looks to be an unqualified success for a state struggling to make homeowners insurance affordable and available. Certainly, both state officials and industry executives are heralding the domestics’ growth. Domestics are “filling a very important void right now,” says David Sampson, president and CEO of Property Casualty Insurers Association of America. Says Florida Insurance Commissioner Kevin McCarty, “The growth of the Florida domestic market is critical to the rebuilding and revitalization of our marketplace.”
Critical, but as American Strategic CEO John Auer indicates, they are far from a cure-all.
Auer, a veteran insurance industry executive, saw opportunity in 1997 when he and his management team assembled $6 million in seed capital to found American Strategic. (Auer and his management team control 52% of the group; the rest is owned by one of the largest reinsurers in the world, Bermuda-based XL Re Ltd.)
Auer wanted to be a “premier operator” known for disciplined underwriting. Many insurers say that, of course, but others in the industry hold American Strategic’s success as worthy of emulation. Direct premiums at American Strategic and its smaller sibling ASI Assurance more than tripled in the last five years, reaching $357 million in 2007. Their combined profit in 2007 hit $40 million.
Some domestics got their start taking policies from Citizens or its predecessors. Auer, worried about assuming unknown risks, chose organic growth.
To control risk, American Strategic and other domestics rely on computer models of thousands of potential storm paths. The company evaluates prospective customers based on the age of their homes (and thus what building codes the builders followed), past losses, proximity to water and other data.