Amid Florida’s insurance crisis, investors and one senator see an opportunity

TALLAHASSEE — When Floridians go shopping for a new homeowner’s insurance policy next year, they may find several new companies offering coverage.

Including one company backed by a current state senator.

Lured by the nation’s highest premiums and new laws that make it harder to sue insurance companies, investors see opportunity in Florida’s broken insurance market. Current and former government officials and other observers said they receive regular inquiries from potential investors looking to make a profit.

“Right after we finished the last vote of the session, I had several people … including legislators asking me if I wanted to invest in an insurance company,” Sen. Jason Pizzo, D-Hollywood, told the state insurance commissioner last month.

That includes state Sen. Joe Gruters, R-Sarasota, who suggested his fellow lawmakers invest in a new homeowners insurance company that projects a 165 percent return on investment over five years.

Investing millions of dollars in one of the most volatile insurance markets in the country may seem like folly. Hurricanes and floods multiply. Meanwhile, many companies have gone bankrupt without being affected by any of these threats.

But Florida-based insurance companies use unusual financial structures that can allow executives to extract significant profits from homeowners’ premiums.

These structures, combined with a reduced threat of lawsuits, are an enticing combination, at least for some investors. Gov. Ron DeSantis and state regulators see it as a solution to the state’s insurance crisis, hoping free market competition will eventually drive down rates.

“The market needs green shoots, and it’s exciting to see new companies,” said former state Sen. Jeff Brandes, R-St. Petersburg, who was an outspoken proponent of tort reform in the legislature.

Pizzo, one of the state’s wealthiest lawmakers with a net worth of $60 million, declined to invest in Gruters’ company. He also turned down nearly a dozen other offers from investors, he told the Times/Herald.

“I just don’t want to be directly involved in making a profit out of what I think is less restrictive or more favorable to insurers,” said Pizzo, who was one of the few Democratic lawmakers to vote for the legislation this year.

For the public, the prospect of lawmakers creating insurance companies immediately after passing legislation affecting those companies is “probably not great,” he said. But he’s not mad at Gruters for trying.

“If he gets them affordable policies, I don’t think they’ll care,” Pizzo said.

“A unique and lucrative opportunity”

To solve Florida’s insurance crisis, DeSantis and lawmakers have tried to stop people from suing insurance companies, which insurers blame for skyrocketing premiums.

Although lawmakers and regulators haven’t proven that lawsuits drive up rates and drive insurers out of business, they passed legislation in December that stopped requiring homeowners insurance companies to pay attorneys’ fees when plaintiffs sue and win. This year they extended this to all insurance companies.

The legislation has yet to have a significant effect on homeowner premiums, which the industry now believes will not decrease in the foreseeable future due to factors such as climate change.

But it sparked immediate interest from investors looking to put their money into insurance companies.

Barry Gilway, former head of state-owned Citizens Property Insurance, said he gets calls from investors at least every two weeks. The reduced threat of litigation and the potential to start by pulling thousands of policies from Citizens interested them, he said.

“You have a number of different investors looking at this … as a real potential opportunity,” he said.

Gilway said the market is so active that he would consider joining one of the companies.

“If the right opportunity presented itself, I would be serious about coming back,” Gilway said.

One of the new companies is Village Protection Insurance, led by a former executive of reinsurance brokerage GuyCarpenter, according to trade magazine Inside P&C.

In May, two months after lawmakers passed sweeping benefit reform legislation, the company announced it was raising $75 million from investors, the paper reported. In August, the company said it had changed that goal to $55 million. (The minimum to start an insurance company in Florida is $15 million.)

It is not clear what role Gruters, an accountant by profession, has in the company. His involvement was not previously announced and he did not return calls and text messages for comment.

In an investor proposal sent by Gruters, company leaders wrote that “a unique and lucrative opportunity lies ahead for investors” as Florida’s insurance market “undergoes transformative disruption.” They tout an experienced leadership team with “fresh perspectives” to meet consumer and investor demands.

The presentation directs potential investors to a financial projection spreadsheet showing the company will take 20,000 policies from Citizens over the next year. By 2028, the company will grow organically and write $475 million in premiums on 99,596 policies for an average customer premium of $4,775. (The current statewide average is about $6,000, according to industry groups.)

The presentation directs investors specifically to one category of finance involving the company’s “general managing agent,” which is a subsidiary. Village Protection Insurance’s managing general agent would charge the company 28 percent of all premiums, plus a $25 fee for each new policy, typical rates for Florida-based insurance companies. Most of that money will go to paying a contractor to run Village Protection Insurance’s operations, according to Inside P&C: everything from underwriting to claims management to reinsurance and customer service.

After these costs are paid, there will be tens of millions of dollars left over to pay back investors each year. By 2028, the company will show a cumulative return on the managing general agent’s investment of 165%, the filing shows.

“We strongly believe that this venture represents an exceptional opportunity to achieve exceptional returns in an environment of change and growth,” the filing said.

Gruters voted for December 2022 legislation requiring homeowners to pay their attorneys’ fees, along with other senators who work in the insurance industry. Senate rules require senators to vote on bills unless the senators know they will experience “special personal gain or loss” from the measure. In these cases, senators must disclose why they abstained from voting.

Gruters also voted for this year’s legislation that shields all insurance companies from paying attorneys’ fees in most situations, but he pushed back most of his party by voting for an amendment that would have softened the bill. Repair failed.

A recipe for success – and failure

Since Hurricane Andrew in 1992, Florida’s homeowner’s insurance market has been dominated by small state insurance companies, the opposite of nearly all other states.

These Florida-based companies typically use managing general agents and other subsidiaries that bill the insurance company for services or fees.

While an insurance company’s profits are limited by regulators and the fees of its general agents are approved by regulators, the activities of managing general agents are unregulated. State lawmakers tried to pierce the veil on insurer subsidiaries this year, but provisions that would have required affiliates to report more information to the state were stripped from the legislation. One key senator said they did not want to “upset the apple cart” of the insurance industry.

This formula is a recipe for success – or stunning failure – for some companies.

He successfully attracted investors and sparked new insurance companies. But it’s also a consistent theme in many companies that have failed.

State-hired forensic accountants have repeatedly cited excessive or unusual payouts to subsidiaries of failing insurance companies. Some of these payments were not approved by regulators. Others were fees for overlapping services.

While it is not unusual for insurance companies in other states to use managing general agents, Florida is unusual in allowing managing general agents to be a subsidiary company with the same management, according to Birney Birnbaum, former chief economist for the Texas Department of Insurance and current CEO of The Center for Economic Justice.

The arrangement doesn’t make sense for a large insurer unless the company wants guaranteed cash flow regardless of whether the insurance company is profitable, Birnbaum said.

The agreement represented an “incredible conflict of interest,” he said.

“The question is, why would regulators allow it?”