Insurance: Big Risks, Big Payoffs

The Tampa Tribune–May 7, 2008

By MICHAEL SASSO

TAMPA – To some investors, pumping money into a new Florida insurance company must be as attractive as investing in Florida real estate right now. The potential upside is great, but you also might fall off a cliff.

But even with the threat of hurricanes and sinkholes, one startup insurance company is asking people to purchase its stock, and more insurance startups may follow.

Last week, a relatively new company with ties to the Tampa Bay area, Homeowners Choice Inc., announced plans for an initial public offering. It was the first of nearly 40 new property insurers that have entered Florida since 2006 to do so, and some industry insiders expect other startups to file for their own IPOs in the near future.

Florida insurance executives say new homeowners insurers in Florida have a big potential upside: They potentially can win millions of dollars in business from homeowners dropped by the likes of Allstate and Nationwide.

However, anyone thinking about buying shares in a new insurance company in Florida would have to realize the risk. If an insurer were to be bowled over by hurricanes and declared insolvent, stockholders would lose out, said Bob Hartwig, an economist and president of the Insurance Information Institute trade group.

“My word of caution is remember that generally speaking, startups won’t be as well capitalized,” Hartwig said.

Homeowners Choice is based in Port St. Lucie on the east coast, but is controlled by Bay area businessmen and is planning to move its headquarters to Clearwater this summer. Its chairman is Paresh Patel of Clearwater, a private investor and telecommunications industry consultant. Six of the other seven people on its board also are from the Bay area.

Like many other new Florida homeowners companies, Homeowners Choice tapped into the huge pool of homeowners insured by Citizens Property Insurance Corp., the quasistate insurer, for its customer base. State law allows private insurers to “take out,” or assume, policies from Citizens in an effort to reduce Citizens’ huge potential liability from storms. Since starting business last June, Homeowners Choice has taken out 23,000 policies from Citizens representing $66 million in annual premiums.

Homeowners Choice and other so-called “takeout” companies now are hoping to go the next step and win over new voluntary customers, rather than just assuming policies from Citizens. To do so, the company last week filed paperwork announcing it hopes to sell 1.3 million to 1.7 million units of stock through an IPO for $5 to $7 apiece. A unit is composed of one share of stock and one warrant (similar to a stock option) to purchase stock.

Company executives and directors could not comment for this article, because they are in the so-called “quiet period” before an IPO, a company spokeswoman said. However, in their filing Homeowners Choice said it hopes to raise about $10 million from the IPO and use the money, among other uses, to build its surplus with which it could pay claims.

Hartwig, the Insurance Information Institute president, expects to see other Florida startups file for IPOs in the near future. After the brutal 2004 and 2005 storm seasons, major insurers dropped hundreds of thousands of Florida homeowners, and with incentives from the state, small startups began to fill the void.

According to the Florida Office of Insurance Regulation, at least new 39 property insurers have entered the state since January 2006, many to take advantage of all the business that Allstate and other insurers dropped.

The time may be right for some of those startup insurers to consolidate operations, and some insurance companies may want to raise cash to expand or purchase other companies with an IPO, Hartwig said.

Two other local startup insurance companies, Edison Insurance of St. Petersburg and American Integrity Insurance of Tampa, have no plans to go public, officials of each company said.

So, why would anyone invest in an insurance company in Florida?

Tom Zutell, a spokesman for the Office of Insurance Regulation, said the new startup companies are trying to limit their exposure to storms with “surgical precision.” They are only writing policies for areas away from the coast or in areas with good building codes.

“With a lot of research and experience, these people think they can target their business to places where they would not experience heavy losses,” Zutell said.

Even so, a surge in competition over the last couple years is forcing some insurers to write policies they wouldn’t have written previously. Edison Insurance has had to start insuring properties closer to the water because of competition for the least hurricane-prone properties, Edison Chief Executive Officer David Howard said.

Some insurance officials suggested that investing in a Florida insurer isn’t unlike investing in anything else.

“As with any investment, people are going to read that stock prospectus and decide whether to roll the dice,” said Lisa Miller, a spokeswoman for American Integrity Insurance.