TALLAHASSEE — When Floridians shop for a homeowners insurance policy next year, they could find several new companies offering coverage.
Including one company backed by a state senator.
Lured by the nation’s highest premiums and new laws making it harder to sue insurance companies, investors see an opportunity in Florida’s beleaguered insurance market. Current and former state officials and other observers said they are receiving regular inquiries from potential investors looking to make a profit.
“As soon as we were done with the last vote in session, I had a couple of people ... including legislators, asking if I wanted to invest in an insurance company,” Sen. Jason Pizzo, D-Hollywood, told the state’s insurance commissioner last month.
That includes state Sen. Joe Gruters, R-Sarasota, who has pitched fellow lawmakers on investing in a homeowners insurance company that projects a 165% return on investment over five years.
Investing millions of dollars in one of the nation’s most volatile insurance markets might seem like folly. Hurricanes and floods are multiplying. Meanwhile, numerous companies have gone insolvent without being hit by either of those threats.
However, Florida-based insurance companies employ unusual financial structures that can allow executives to extract considerable profits from homeowners’ premiums.
Those structures, combined with a reduced threat of lawsuits, are enticing at least to some investors. Gov. Ron DeSantis and state regulators see it as the solution to the state’s insurance crisis, hoping that free-market competition will 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, a vocal supporter 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 turned down nearly a dozen other pitches from investors, he told the Times/Herald.
“I just don’t want to be directly involved with profiting off of what I think is less restrictive, or more favorable, conditions for insurers,” Pizzo said.
The optics of lawmakers forming insurance companies right after passing legislation affecting those companies “probably aren’t great,” he said. But he doesn’t begrudge 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 tried to stop people from suing insurance companies, which insurers have blamed for rapidly rising premiums.
Although lawmakers and regulators haven’t proven that lawsuits were driving up rates and causing insurers to go out of business, they passed legislation in December that stopped requiring homeowners insurance companies to pay attorney’s fees when plaintiffs sue and win. This year, they extended that to all insurance companies.
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The legislation hasn’t yet had a meaningful effect on homeowners’ premiums, which the industry now says will not go down in the foreseeable future because of factors such as climate change.
But it has sparked immediate interest from investors looking to put their money into insurance companies.
Barry Gilway, the former head of state-run Citizens Property Insurance, said he’s fielding calls from investors at least every two weeks. The reduced threat of litigation and the potential to get started by pulling thousands of policies out of Citizens has them interested, he said.
“You have a number of different investors that are looking at this … as a real potential opportunity,” he said.
Gilway said the market was so active that he’d consider joining one of the companies.
“If the right opportunity came along, I’d get serious about jumping back in,” Gilway said.
One of the new companies is Village Protection Insurance, led by a former executive with the reinsurance broker firm GuyCarpenter, according to the trade journal Inside P&C.
In May, two months after lawmakers passed sweeping tort reform legislation, the company announced it was raising $75 million from investors, the publication reported. In August, it reported the company changed that target to $55 million. (The minimum to start up an insurance company in Florida is $15 million.)
It’s unclear what role Gruters, an accountant by trade, has with the company. His involvement has not been previously reported.
In a text message after this story published, Gruters wrote that the new laws will “reduce frivolous lawsuits that have caused the root of this problem.” He wrote that he was proud to try to fix the problem of the “lack of insurers and capital to write affordable policies.”
“Where others have complained — I’m rolling up my sleeves, taking action and delivering solutions,” he wrote.
In a pitch to investors sent by Gruters, company leaders wrote that “there lies a unique and lucrative opportunity for investors” as Florida’s insurance market “undergoes a transformative disruption.” They tout an experienced leadership team with “fresh perspectives” to meet the demands of consumers and investors.
The pitch directs potential investors to a spreadsheet of financial projections that show the company would take 20,000 policies out of Citizens next year. By 2028, the company would grow organically and write $475 million in premiums across 99,596 policies, for an average customer premium of $4,775. (The current statewide average is around $6,000, according to industry groups.)
The pitch directs investors to one category of the financials in particular, involving the company’s “managing general agent,” which is an affiliate company. Village Protection Insurance’s managing general agent would charge the company 28% of all premiums, plus a $25 charge for every new policy, typical rates for Florida-based insurance companies. Most of that money would go to pay a contractor to perform Village Protection Insurance’s business, according to Inside P&C: everything from underwriting to claims management to reinsurance and customer service.
After paying those expenses, tens of millions of dollars would be left over each year to repay investors. By 2028, the company would show a cumulative return on investment of the managing general agent of 165%, the document shows.
“We firmly believe that this venture presents an extraordinary chance to achieve exceptional returns in an environment of change and growth,” the pitch states.
Gruters voted for the 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 senators know they would experience a “special private gain or loss” from the measure. In those instances, senators must disclose why they abstained from the vote.
Gruters also voted for this year’s legislation shielding all insurance companies from paying attorneys’ fees in most situations, yet he bucked most of his party by voting for an amendment that would have watered down the bill. That amendment failed.
A recipe for success — and failure
Since Hurricane Andrew in 1992, Florida’s homeowners insurance market has been dominated by small, state-based insurance companies, unlike most other states.
Those Florida-based companies commonly use managing general agents and other affiliate companies, which charge the insurance company for services or fees.
While insurance company profits are capped by regulators, and its managing general agent fees are approved by regulators, the managing general agents’ activities are not regulated. State lawmakers tried to pierce the veil on insurers’ affiliate companies this year, but provisions that would have required affiliates to report more information to the state was removed from the legislation. One key senator said they didn’t want to “upset the apple cart” of the insurance industry.
This formula has been a recipe for success — or failure — for some companies.
It has successfully lured investors and sparked new insurance companies. But it also has been a consistent theme in the many companies that have gone bust.
Forensic accountants hired by the state have repeatedly cited excessive or unusual payouts to affiliated companies for insurance companies failing. Some of those payments were not approved by regulators. Others were fees for overlapping services.
While it’s not unusual for insurance companies in other states to use managing general agents, Florida is unique in allowing managing general agents to be a sister company with the same management, according to Birny Birnbaum, executive director of the Center for Economic Justice and a former chief economist at the Texas Department of Insurance.
The arrangement doesn’t make sense for a large insurer unless the company wanted a guaranteed stream of money regardless of whether the insurance company was profitable, Birnbaum said.
The arrangement posed “an unbelievable conflict of interests,” he said.
“The question is, why would regulators permit it?”
This story has been updated since initial publication to include comment from Sen. Joe Gruters.
(Editor’s note: A previous version of this story incorrectly stated Pizzo’s voting record.)