Florida ‘still cash cow’ for insurers, say KBW analysts after Guy Carpenter Summit

Analysts from Keefe, Bruyette & Woods (KBW) said “Florida is still a cash cow for reinsurers”, with demand looking “flat to up”, while “supply looks flat”, following Guy Carpenter's (GC) 2019 Florida Summit.

The analysts pointed to GC estimates that changes in Florida Hurricane Catastrophe Fund election participation will have a “roughly flat demand impact”.

Recent Demotech ratings changes should modestly increase reinsurance demand, they said, as reinsurance purchasing requirements were raised for a first event from a 100-year return period to a 130-year return period.

They estimated insurer M&As would have a negative impact on demand as companies consolidate panels post-acquisition. When this is combined with increased Demotech-driven demand and a flattish net FHCF impact, they estimated flat-to-higher mid-year demand.

They said: “Higher demand (unlike GC, our assumption doesn't include M&A given its unpredictability) should put upward pricing pressure at mid-year given GC's expectations that traditional and convergence capital remains flat at mid-year. Hence, we think GC's analysis is consistent with our existing thesis assuming mid-single-digit mid-year rate increases with variability by recent cedent performance.”

The analysts added that “Florida is still a cash cow for reinsurers”, explaining that over the past ten years, Florida insurers have ceded $52.3 billion to reinsurers while only paying $24.6 billion in losses during that time. “[This implies] a very healthy 47 percent loss ratio and a strong 79-80 percent combined ratio after factoring in reinsurers' 32.6 percent average 2018 expense ratio, which we use as a rough proxy for their current cost structure,” they said.

“We think the strong profitability of these trading relationships over time should limit the impact of rate increases for most Florida carriers to manageable levels, mostly reflecting an increase in indemnity and LAE expenses based on Irma loss creep drivers beyond current modeled expectations.”

They said: “We think it's a fairly easy argument to make that -- absent some assignment of benefits (AoB) reform -- if another Irma-like event struck in 2019, it could cause similar loss creep for reinsurers unless factored into cat models since the Florida insurance litigation environment hasn't changed materially since Irma.”

Earlier this week, insurance commissioner David Altmaier praised Florida’s leaders for ensuring consumers were following the recent advancement of AoB reform efforts in the House Insurance and Banking Subcommittee and the Senate Judiciary Committee.

He said: “I applaud the leaders and individuals who have partnered with the OIR and many others across our state to protect Floridians.

“An insurance affordability crisis has been identified and if left unchecked, rates will likely continue to rise, and companies will likely stop writing policies in zip codes where AOB abuse is most prevalent. As a result, consumers will be left to navigate a crippled insurance market as they prepare for the next major hurricane to make landfall. Floridians deserve better and we owe it to our consumers.

“We stand with the many leaders who have prioritized consumer protection during the 2019 Legislative Session and their bi-partisan support towards AoB reform.”

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