Insurer finds success picking up hurricane policies

Baton Rouge’s 1347 Property Insurance Holdings sold 2.1 million shares and generated $17.4 million in going public the first week of April. Drawn by the company’s high-risk, high-reward business plan, investors pushed share prices from $8 in the initial public offering to more than $10 before settling to the mid-$9s.

The company drew its name from the year the first property insurance contract was signed in Europe, and 1347 is also something of a pioneer in Louisiana.

A major focus for the company involves picking up the riskier wind-and-hail only policies from the state’s insurer of last resort, a line of business Louisiana Citizens Property Insurance Corp. would be only too happy to shed.

Roughly 6,000 of 1347’s 11,500 policies are wind-only. The policies basically cover the damage caused by hurricanes.

“We look at it and we say, ‘You know what? High risk, high reward,’” Chief Executive Officer Douglas Raucy said.

The losses on those policies could be large, but 1347’s piece of the homeowner’s total premium is, as well, Raucy said. About 60 percent to 70 percent of the total premium covers the wind-and-hail risk.

More than half of 1347’s policies lie in four parishes: Jefferson, 25.1 percent; St. Tammany, 10.9 percent; Orleans, 9.6 percent; and Terrebonne, 6.9 percent. No other parish has more than 5 percent of the policies.

1347 also plans to capitalize on national insurers’ strategy to reduce their personal property coverage in Louisiana, partly by writing fewer policies that include wind-and-hail coverage.

Insurance Commissioner Jim Donelon said he’s not happy about the trend among national companies, although it provides a business opportunity for smaller firms.

“It just requires that we be ever-diligent in our oversight of those companies, because the reason the big boys are stepping out is it’s a very volatile and risky part of the property insurance business,” Donelon said.

The state limits the potential fallout by making sure insurers have the financial means, including reinsurance, to pay claims. Louisiana hasn’t had a failed insurer in the past decade. It’s been longer than that since the state guaranty fund, which covers the claims of failed insurers, has levied an assessment against other insurance companies to cover those costs. Meanwhile, the fund has increased the maximum size of those homeowner’s claims from $150,000 to $500,000.

1347 is balancing its risk by:

Picking up just the wind-only policies written by State Farm, Allstate and Farm Bureau. Those companies have a great reputation for underwriting, which makes 1347 comfortable with sharing the risk with them, Raucy said. The other three companies cover the remaining perils, such as burglary, fire and liability.

Making sure half of its book of business remains the standard homeowner’s and manufactured housing policies. In order to grow long term, 1347 needs the so-called voluntary business, where people can shop for coverage from private insurers. This segment is where a company can do well through underwriting, or examining and classifying a customer’s insurance risks. 1347 uses independent agents to sell these policies.

Buying reinsurance, the insurance that protects insurance companies from excessive claims. 1347 has the state-mandated reinsurance level, enough coverage for a 1-in-100-year storm. At its current level of surplus, the cushion that insurers can draw on in case of unexpectedly high claims, 1347 has to cover about $1 million of the hurricane damages.

Wind-only policies became a necessity for some coastal residents following hurricanes Katrina and Rita in 2005. Some large insurers stopped offering coverage for hurricane damage after the massive storms. Citizens began selling wind-only policies to fill the gap.

But the state-backed insurer’s rates were, at first, so low that consumers saved money by buying split policies. As a result, Citizens began picking up more and more wind-only business. It was only after Citizens instituted double- and sometimes triple-digit rate increases in some areas that its wind-only policy count began shrinking. Since 2008, wind-only policies have increased by an average of 56.3 percent statewide.

The average annual premium for Citizens’ wind-and-hail-only policies is now about $1,465. Citizens now has about 20,000 wind-and-hail policies for individuals. In mid-2012 the company had 37,500.

Vijay Ramachandran, Citizens’ vice president and chief underwriting officer, said 1347 is one of four companies that have picked up wind-only policies from Citizens.

Competition is a good thing for the residents of Louisiana, and it also helps Citizens achieve its mission as the insurer of last resort, Ramachandran said. While Citizens can further reduce its wind-and-hail policy count, it’s unlikely the company can completely get out of the business.

State law requires Citizens to write wind-and-hail-only on a stand-alone basis. Other companies are free of that requirement.

Ramachandran said if the captive agents, who can write coverage only for their employer, were allowed to place wind-only coverage with other private insurers, Louisiana would have a more vibrant market. And Citizens would see its wind-only business fall even further.

Raucy said 1347 subsidiary Maison Insurance Co. has picked up 6,000 Citizens policies in the past two years.

It helps that Raucy spent a lot of years with Allstate, that Maison is Baton Rouge-based and that the company has Louisiana employees. But there’s no magic formula.

“It’s still a lot of hard work,” Raucy said.

Maison converts just 25 percent to 30 percent of the policies it selects from Citizens. Insurance agents have the final say on whether to release a policy to the company. Some have never done so and don’t plan on changing that.

Donelon said there are limits on Louisiana’s wind-only business, the main one being a state law that prevents insurers from canceling homeowner’s policies that have been in place for three years, although there are a few exceptions.

Still, the law prevents 90 percent of the market from seeing split coverage.

At least three other insurers besides Maison have begun writing those policies: Access Home Insurance Co., Lighthouse Property Insurance Co. and Centauri Insurance Co.

Centauri has only a handful of the policies and doesn’t plan to add more, spokeswoman Felicia Cox said.

Scot Moore, executive vice president at Lighthouse, said wind-only policies offer an opportunity in Louisiana and other coastal states with large populations along their coastlines.

“There’s a higher risk of loss related to those properties … but when priced properly, you can make a higher profit for the risk you’re taking,” Moore said.

When there are weather events, like the hail storm that struck the New Orleans area in 2013, Lighthouse will lose money. But that’s the way the homeowner’s business goes in any catastrophe-prone state.

Lighthouse began offering wind-only coverage this year so that it could pick up some of the Citizens’ policies. But Lighthouse only has “a couple hundred” of those in Louisiana and roughly 700 in South Carolina. Wind-only isn’t expected to become a major line of business for the company.

Lighthouse believes the standard homeowner’s policy provides the most protection for consumers and is also less confusing for them, Moore said. Homeowners don’t always understand the differences in the coverage. At the end of the day, they don’t want to figure out what loss is covered by which policy. Consumers want the insurance company to cover their losses.

Access Home President Hale Campbell said wind-only policies make up about 20 percent of the company’s total book of business.

Wind-only policies will remain attractive as long as they balance the company’s portfolio. The price has to match the risk taken, and, for the most part, it does. The cost of reinsurance is also a key to writing that business.

“I don’t see that wind environment getting horrendously bigger,” Campbell said.

Enough insurers, and not just those offering wind-only coverage, have come into Louisiana since Katrina to offset the firms that left, Moore said. The Louisiana marketplace has become relatively stable, with state regulators, private companies, Citizens and reinsurers playing a part in that.

Raucy said 1347, incorporated in October 2012, doesn’t mind the competition.

For now, 1347 is taking other steps to reduce its risks by limiting its overhead costs, a critical need for a startup. The company is outsourcing customer service, claims and policy administration to WaterStreet Co. in Montana. Keeping those services well away from a hurricane-prone area also ensures they will be available in the event of a catastrophe.

1347 eventually plans to expand its wind-only business model to other states, including Hawaii, Florida and Texas. But those plans lie somewhere in the future.

“For the next year, year-and-a-half or so, we’re going to focus on Louisiana and make sure we capture as much market opportunity as we can,” Raucy said.