The Florida Insurance Market
One of the most bullish things I've seen. Yet I'm two years late to it.
The Florida insurance market has made some radical changes since late 2022. It’s no coincidence that many of the stocks with large exposure to the Florida insurance market not only bottomed around that time but are up a decent amount since then (95%, 218%, 526%, 3,196%).
First, I want to share with you how I came across this & how I didn’t come across this. Let’s go over the second point first. Half of my feed on Twitter is full of old-economy, hard-asset value investors, along with commodity and event driven, catalyst driven inflection investors. And yet I don’t recall seeing anything mentioned about this. I find that frustrating.
The way I came across this theme was by initially being curious about what the trade around hurricane Milton would look like. I’m different from most. Most people I know want to manufacture indignation and get emotionally riled up about news events, while I want to know how to make money from it. Nonetheless, I came across a few ideas (MOS, ALCO and insurance companies. Once I latched onto the idea of insurance companies, I saw a tweet that said in passing that the Florida insurance market has changed a lot recently. I was curious as to how. Also, I’ve been wanting for some time to arm myself with facts and information to combat idiots who want to bemoan the cost of insurance going up across America. I thought this was the time. From there I simply Googled “Florida insurance”. I also searched “Florida Insurance” on Spotify. Once armed with numerous articles and podcasts I gave them a read and listen. Many of them had a liberal bent with titles such as The Climate Change podcast.
My God! Once I was done reading and listening to these publications I walked away about as bullish as a person could be. The problem is this trade started 2 years ago. Lol. And, I’ve missed at least the first few innings of this trade if not the whole trade. Also, I know how biased people like to exaggerate. It’s not wise to be bullish based upon exaggeration (you know, because exaggeration isn’t actual reality). Had I known about this back then I would have sized this up as a position.
Just read these articles and tell me this isn’t/wasn’t a bullish set up. Or just keep reading this article.
Link: Florida Republicans protected insurance companies
Link: Florida insurance companies sidestepping rules meant to prevent excess profits
Link: Florida leaders forcing thousands to pay higher prices for insurance
Link: Florida lawmakers are driving up insurance costs
Link: Formulas used by Florida insurers might become more secretive
Those links are all from Seeking Rents by Jason Garcia. He also has a podcast.
In one of his articles, he posted this chart.
The “Indicated Competitive” column is essentially how much Citizens need to raise their rates.
Once I saw this chart, my bullishness was a sealed deal. But before delving into that chart we need a history lesson.
FLORIDA'S OWN INSURANCE COMPANY
Back in 2002 Florida created a state-run nonprofit property insurance company called Citizens Property Insurance Corporation. It really started taking hold after the rather nasty 2004-2005 hurricane season as seen in the below graph (blue bars).
Then following that time period, we had the GFC which prevented people from going back to the private markets. But a benign hurricane period & the economy picking up again created new entrants to the market with competitive rates.
Citizens was a so-called lender of last resort for those who couldn’t get coverage elsewhere.
To paraphrase Hyman Minsky, "The lender of last resort will eventually become the lender of only resort."
And that’s what Florida is afraid of. And the reason is simple. Their actuarial prices aren’t actually actuarial. Meaning that it’s only a matter of time before a large enough hurricane or sequence of smaller hurricanes hit and they’ll not have the money to pay out. This is due to not charging a high enough premium.
Actuarial is to insurance what AISC is to mining. It’s a bullshit number because it doesn’t tell you what people try to make it out to be.
If insurance companies go bankrupt after catastrophic events like 1-in-100-year storms, it indicates that they did not accurately price in the actual actuarial risk associated with those events. Yet, many of them would have sworn that their modeling of matters was accurate.
So, people want to tell you that Citizens could actually lower their premiums due to the actuarial risk but it's due to the big bad corporate greed monsters needing competitive rates. Here’s a simplification of many of these actuarial models.
I’ll take in $1 a year anticipating I’ll have to pay out $0.97. And then once every 10 years I’ll have to pay out $1.50 due to a bad run of storms or one big bad one. But we’ll just pretend like that statistical outlier doesn’t exist.
I suspect they’re using some sort of traditional actuarial model that assumes that risks follow a normal distribution, which leads to underestimating the probability impact of outlier events (so-called fat tails). The VaR bro measures potential losses in normal market conditions, which doesn’t adequately capture extreme events or spikes, as it typically focuses on average conditions. Using standard deviation as a measure of risk downplays the significance of outliers and the subsequent extraordinary costs associated in payouts.
This all leads to the underpricing of risk. And I suspect this is being done because to actually price in the risk means that premiums are going much higher. And insurers have been either forced by regulation to keep premiums artificially low or attempting to subsidize consumers for one reason or the other. However, it seems that’s changing in the state of Florida.
If what I’m saying isn’t true then why is the Senate budget committee investigating Citizens. And why did Desantis himself say they weren’t solvent?
MODERN TIMES
And now to modern times. You can see that once inflation started picking up in mid 2021 so did the policy count. Both in part because insurance companies recognized that Florida was no longer viable to do business in and were leaving but also because people couldn’t afford their insurance anymore. Especially all of those who weren’t deemed “necessary workers”. Premiums in part are tied to the home's value & home values increased substantially across much of Florida, in part due to a mass exodus fleeing tax-harvesting lockdown states.
Citizens market share jumped from 8% to 13% between 2021 & 2022. That’s a 62% growth in a single year.
Here’s a chart that shows it better.
According to Citizens most recent market share report, they seemingly have peaked out in 2023. It’s not because people are better off or because the private market is a better option such as in the 2010s but due to Senate Bill 2A picking up speed.
Between Q1 2023 and Q1 2024, their policies in force fell 6%. This is part of their depopulation strategy. They’re putting policies back in the hands of private insurers.
By looking at Citizens Market Share Report we discover that they're the largest player of any insurer in Florida and almost double that of the runner up.
I suspect the drop of market share is going to be even more substantial going into 2025.
According to Newsweek:
“On August 2, insurance commissioner Michael Yaworsky signed an order allowing 10 private insurance carriers to take on 413,808 policies from Citizens beginning in late October. According to a report by Florida Politics, in the last two weeks, a further 235,035 were approved for removal beginning in November.”
SIGNIFICANT LEGISLATIVE REFORM TAKES PLACE
In December 2022 Senate Bill 2-A (PDF) was signed into law.
You should note that the elimination of one-way attorney fees and assignment of benefits is due to all the Florida roof scams that were occurring in the state.
“The scam works like this: Contractors knock on doors offering to inspect homeowners’ roofs for storm damage. They say they can help get a roof replacement covered by insurance, and they persuade the homeowners to sign away their rights to file the claims themselves. The contractors then file fraudulent damage claims, and when the insurance companies balk, the contractors sue. The insurance companies usually settle the disputed claims for many times more than the original claim. Most of that money goes to the contractors’ lawyers in the form of a “contingency fee multiplier.” Some lawyers file hundreds of such lawsuits a year. The homeowner may get a free roof, but everyone pays for it through increased rates.”
Some things that Senate Bill 2A did are:
Elimination of One-Way Attorney Fees: This change means that policyholders can no longer automatically recover attorney fees if they win any amount in a lawsuit against their insurance company. This provision was aimed at reducing frivolous lawsuits.
Assignment of Benefits (AOB) Ban: SB 2-A bans the assignment of post-loss insurance benefits for policies issued on or after January 1, 2023. Prior to this, contractors could take over insurance claims from homeowners, which often led to inflated costs and increased litigation.
Citizens Property Insurance Corp: While Citizens was already the insurer of last resort, changes aimed to reduce its policy count by making it less competitive (raising rates) with private insurers, pushing for depopulation (transferring Citizen policyholders to the private market).
Reinsurance Support through FORA (Florida Optional Reinsurance Assistance):
Citizens have to set competitive rates.
Now back to the most bullish image, from this Seeking Rents article.
He did such a fine job explaining why it’s bullish.
“If Citizens were simply required to charge actuarially sound prices, the company could reduce its basic rates in Miami by 4 percent. That’s according to Citizens’ own calculations. But because DeSantis and lawmakers are once again forcing the nonprofit insurer to artificially inflate its rates, Citizens plans to raise rates in Miami by 14 percent this year — which is the maximum annual increase it can impose under current law. And it won’t stop there. Citizens’ calculations show that it would ultimately have to raise homeowners’ rates in Miami by more than 80 percent in order to avoid competing with the private market. That’s right. Florida leaders created a nonprofit insurance company that could lower its rates in Miami tomorrow and still be financially sound. But instead, they have ordered the company to nearly double its prices.”
The reason this is bullish for the private insurers is because Senate Bill 2A includes provisions that require policyholders to accept coverage from a private insurer if the offered rates are within 20% of what they are currently paying with Citizens Property Insurance Corporation. Homeowners are mandated to accept that coverage instead of remaining with Citizens.
And since Citizens have demonstrated that they plan to keep raising rates that means that the private insurers can tacitly collude and keep raising rates, too. Essentially meaning that private insurers have cover to raise rates for multiple more years. Of course, there’s a competition dynamic at play here since insurers are now coming back into the state.
The below image is from Citizens 2025 Recommended Rate Filing. And don’t forget, the rate change is capped by law, otherwise they’d even be higher.
It’s my guess that they’ll be maxing out the rate changes for 2026, too. This is from their Public Rate Hearing.
Citizens are on a glidepath of raising rates mid-teens percent for at least the next couple of years. And I suspect that they’ll be maxing out the rates for years after that.
They’re in need of playing serious catch up to the tune of 96.8% (chart below) in order to be “Indicated competitive” from the bullish chart I keep showing you.
That’s 7 years of 14% increases. However, the growth that the private companies are experiencing will abate to some degree due to receiving less and less policy holders from Citizens (depopulation). But for now, the purge (depopulation) is in full force.
Another problem is that more and more competition is coming back to the state.
But hey, it’s not all about helping the insurance companies. DeSantis cares about his citizens too.
That’s why he passed Senate bill 2D in May 2022. It’s all here in this handy-dandy one pager.
He reduced your legal right (or what once was) to assign your benefits (AOC: assignment of benefits). He’s backing the insurance companies with $2B of reinsurance, after all, I don’t know any individual who reinsures their insurance. And he prevents insurance companies from denying coverage based on the age of a roof that is less than 15 years old. Of course, he won’t say that the insurance companies are going to start depreciating the cost of your roof. What does that look like?
Say it costs $20,000 to replace a roof and it's determined that its useful life is 30 years. If at 15 years you need your roof replaced then they’ll give you $10,000 (the depreciated value of it). Then let's say you have a 2.5% deductible on a $200,000 house. That means that you’ll have to pay the other $10,000 for the roof plus $5,000 for the deductible. Meaning, that they’ll end up only paying $5,000 for a $20,000 roof. But hey, they didn’t deny you, they just chiseled you down.
He’s helping the companies help you.
DEPOPULATION
Even how the transfer of policyholders is occurring is set up bullishly for private insurers. So much for consumer protection.
To quote Seeking Rents again:
“These takeovers have been pushed along by some classic anti-consumer tactics. For example, when a private insurance company offers to take a policy out of Citizens, Citizens will mail a notice to the homeowner. And even if the private company’s price is more than 20 percent higher than Citizens, Citizens will require the homeowner to proactively opt out in order to avoid being transferred. A homeowner who misses the notice, or who forgets to respond in time, will get punted to the more expensive private policy by default. Some private companies seem to count on Floridians failing to understand the importance of these takeout notices.”
You can always count on people to test the boundaries of any rule. He continued by saying:
“In fact, at one point, according to the Florida Office of Insurance Regulation, Slide was sending out takeout offers to Citizens customers at prices that were as much as five times more expensive than their current premiums. And the targeted homeowners were at risk of getting trapped in those policies simply because they failed to respond to a letter that could so easily be mistaken for junk mail. Slide’s tactics prompted the Office of Insurance Regulation to cap takeout offers at no more than 40 percent of the Citizens price. The new rule went into effect late last year.”
CONCLUSION
You have 16% of the market getting unlocked for private insurers to cherry pick over, while not needing to take the riskier ones. You have years of rate hikes to come from Citizens which will provide cover for the private insurers to stair step their rates up at mid-teens percent. You have legislation that offsets their costs of reinsurance and legislation that helped get rid of many of the roof scams that's been plaguing the state by less than ethical trial attorneys.
That sounds bullish to me. And it has been. The only question is, will it continue to be?