Many investors have understood that the Florida Property Insurance Market has been mispriced for a long time. The brief history is that insurers incurred large losses during hurricanes Andrew and Katrina. After hurricane Katrina many large providers stopped writing policies in the state as they were no longer profitable. Florida has capped policy rates for years and Florida taxpayers assume much of the mispriced risk as CITIZENS (state sponsored) writes policies at below market rates. Florida’s credit rating was under review due to this large “off balance sheet” liability, and the state was encouraged to allow undercapitalized private entities to write insurance and purchase policies from Citizens.

These smaller undercapitalized companies were aggressively bidding lower rates without proper risk controls, overpaying executives, denying claims, and not purchasing enough reinsurance protection. Essentially they were taking an enormous amount of risk to pay executives at the expense of policy holders (for a more in depth summary of the situation Seeking Alpha has a great article).

While it isn’t necessary to understand the compete Florida insurance backstory, what does matter is that current rates are artificially low due to state involvement and private companies underwriting these insurance policies who appear to be both undercapitalized and unsophisticated. It is very telling that no large national underwriters are present in Florida.

We were interested in monitoring the thinly-capitalized, publicly-traded direct underwriters, who are Federated National (FNHC), HCI Group (HCI), Heritage Insurance (HRTG), United Insurance (UIHC), and Universal Insurance (UVE). We wanted to see how aggressive these independent underwriters had become in the last couple years with premiums, especially in certain counties and in relation to CITIZENS.

There is a website from the Florida Office of Insurance Regulation, CHOICES, which allow users to view rate quotes based on a variety of factors. We wanted to be able to monitor these rates by county and company over time for specific dwelling types ($150k old, $150k w/ wind mitigation, $300k new).

An example public request url is given below:

https://choices.fldfs.com/pandc/Data/CountyRates?iId=2&eId=4&county=Liberty&_=1442205361151

fl-json

We then iterated this same process over myriad housing types and counties - giving us rates for every company, county and housing type. We built a worker process to re-run this method daily and give us a summary of the changes - namely which companies were most aggressively changing prices in specific counties around Miami-Dade.

You can view a snapshot of the data here by county and company.

While we can see aggressive competition in rates pricing in HCI, UVE, and FNHC (and minimal reinsurance overlay), we could not get comfortable shorting one of the underwriters given the high ROEs (over 30%) for these companies. If no hurricane occurred in the next three years, we would be wiped out of our investment. However, the situation is something we are monitoring, and we are looking to see if there is a relatively cheap way to express this trade only during hurricane season.

Update 11/21/2015:

Anthony Bozza of Lakewood Capital presented on UVE at the Robinhood Conference on the 17th, sending the stock down over 30%.