Longtime insurance executives Lora Rees and Ricardo Espino faced a difficult decision last summer.
They could continue on with Sarasota-based Universal North America, an insurance firm they helped launch in 2003. Universal grew from nothing to $300 million in homeowners’ insurance premiums spread across 17 states under their leadership.
Or they could leave Universal, take what was at least a seven-figure payout and use it to launch another property and casualty insurance firm. A start-from-scratch was clearly the riskier of the options, considering the insurance industry, certainly in Florida, is a regulatory mess and companies statewide struggle to maintain profitability.
Rees and Espino nonetheless took the do-it-again choice. The pair, who met in 1995 when they worked for another firm, Policy Management Systems Corp., founded Centauri Specialty Insurance Holdings Inc. in July. The firm is named for Alpha Centauri, the brightest star in the southern
constellation. It’s run out of an office in a Lakewood Ranch corporate park.
“We could have sat still and done nothing,” says Rees, executive vice president and chief operating officer of Centauri. “But that’s not our drive.”
Espino, president and CEO, shares the passion. “We have invested everything we have into this,” says Espino. “Although it was a risky move, it was a great opportunity for us.”
That opportunity isn’t in Florida. That’s because the current regulatory climate in the Sunshine State has made writing homeowners policies a largely unprofitable enterprise, say Rees and Espino. So the firm focuses on finding business in three other Gulf Coast states: Alabama, Louisiana and Mississippi.
“Louisiana sees insurance companies as allies,” Rees says, “while the prior governor in Florida vilified them.”
Rees is referring to former Florida Gov. Charlie Crist, who vetoed a bill in 2010 that many in the industry considered a big step toward reform. The Centauri executives believe Gov. Rick Scott has since moved industry reform in the right direction, at least from a rhetoric standpoint, though they won’t count on a quick turnaround.
“We still have a lot of problems in this state,” says Espino, “but at least we are pointing northward, not southward.”
Centauri has nine employees, including six who work in Lakewood Ranch. The others work in Jackson, Miss. The firm hopes to have 12 to 14 employees by the end of the year.
Espino got into the insurance industry after college, when he worked for AIG. He set high goals for Centauri, given the insurance industry’s issues. “We do expect profitability right away,” says Espino. “That means we have to work harder and smarter than our competitors.”
In addition to the troika of Gulf states it wants to do business in, Centauri already has customers in Hawaii. In fact, the firm has 20,000 policies in Hawaii, a book of business worth $10 million to $12 million it spun off and bought from Universal last summer. With 20,000 policies, it’s the fifth-largest property insurance firm in the state.
The acquisition of Universal’s Hawaii line of business was the birth of Centauri. Espino and Rees decline to discuss what they paid for it. However, Espino confirms it was more than $1 million, and it was “100% of our exit plan” from Universal.
Once the business got started, Espino and Rees got going on a supersized to-do list. Written on a supersized whiteboard in the firm’s conference room, the list is a catchall of risk and opportunity.
The first large-scale opportunity came in October, when the firm was one of five nationwide, and three in Florida, to get a call from the Louisiana Citizens Insurance Corp. Just like Citizens Property Insurance Corp. in Florida, the Louisiana group was formed to protect the Pelican State against a rash of storms — an insurer of last resort.
But pointedly unlike Florida, Louisiana Citizens launched a depopulation program in 2008. Officials worried that the total count back then, 174,000 policies, would become a financial albatross in the event of a heavy storm season, so they sought to shrink the rolls. Louisiana Citizens Insurance
Corp., for a time, was the third-largest homeowners policy firm in the state.
Espino and Rees approached Louisiana Citizens’ depopulation program like a contractor bids for construction work. They filled out forms, explained how they would handle the policies, and detailed what Centauri’s strengths and weaknesses were.
Centauri ultimately picked up 948 policies from Louisiana Citizens. Acceptance from Louisiana Citizens officials, furthermore, was a breakthrough for Centauri. Says Espino: “It put our name out there as a company with an appetite to write residential property insurance.”
Orlando-based Lighthouse Property Insurance Co. took over 5,760 policies from Louisiana Citizens, while Tallahassee-based Capitol Preferred Insurance Co. picked up 1,003 policies. A company from Baton Rouge and a North Carolina-based firm picked up the other policies, according to Louisiana Citizens.
A new company
Espino and Rees now seek to grow Centauri outside the Louisiana policies and the inherited clients in Hawaii. Espino says he hopes Centauri begins to write policies in Mississippi and Alabama by March. His goal is to grow the policy count by 10,000 a year in 2012 and 2013.
One general challenge is the insurance industry, by some experts’ estimation, is still in a soft market. That essentially means premiums and profits are lower, while competition is higher — a dangerous combination for a company with a business model based on risk assessment. A hard market, on the flip side, is marked by higher premiums and potential rate increases.
Past the soft market — which some in the industry believe is hardening — Espino says another challenge is low interest rates. Rates impact Centauri, he says, because the lower the rates, the lower the return the firm can get from its surplus investments. That in turn leads to less capital for growth.
Espino and Rees have worked through other challenges in their careers. For instance, they were with Universal in 2003, a year before Florida was walloped with two straight turbulent hurricane seasons. “The timing was great,” Espino deadpans.
Even before then, Espino and Rees developed an entrepreneur’s survival mentality. Universal, for example, was initially called Newco, for new company, because Espino and Rees hadn’t found an investment partner. But Espino, a Panama native who grew up mostly in Texas, met with executives
of Puerto Rico-based Universal Group in 2003. Universal sought an entry into the mainland U.S., and it hired Espino and Rees to lead the way.
That original investment, $8 million, says Espino, paid off. Universal had $100 million in surplus in July, when Rees and Espino left the firm to launch Centauri. Says Espino: “We turned a fairly small investment for them into something really large.”
Rees, meanwhile, grew up in insurance. Her father is Ralph Schroer, who was a partner with Moore, Fowinkle & Schroer, a prominent Bradenton-based insurance agency. Rees worked at the firm while in high school and college.
Espino and Rees now hope to surpass what they were able to accomplish at Universal. Espino even says he believes one day it will make sense for Centauri to write policies in Florida.
“As long as free market enterprise is afforded, it will allow competitive forces to come and allow the economy to work,” says Espino. “Things have to change and I think they will.”
The Florida Legislature has promised to reform the state’s insurance industry, and the first bill for the 2012 session in that regard recently passed through the House.
Sponsored by Rep. Jim Boyd, R-Bradenton, the bill is aimed at shrinking Citizens Property Insurance Corp., according to the News Service of Florida. Citizens, the state-run insurance entity, is the largest property insurer in Florida.
The bill, according to the News Service, allows Citizens customers to either stay with the current policy or move to another firm, one that might not fall under the same regulations. The bill’s supporters say shrinking Citizens is a good thing because the state already doesn’t have enough
surplus to pay claims in the event of a large storm.
The bill’s opponents in the House, however, say the unregulated aspect of the other insurance firms could lead to some unintended negative consequences for consumers. That includes potential unannounced rate increases.
The bill passed the House 66-48 in a Feb. 3 vote. It goes to the Senate next.
When Florida’s property insurance market is compared with other states in the Southeast or along the Gulf of Mexico, it finishes in last place in a variety of categories. By a wide margin.
That’s the consensus of several nationwide insurance industry analysts. “There is no state that has the risk exposure that we have in Florida,” says Lynne McChristian, Florida representative for the New York-based Insurance Information Institute.
Some of that risk exposure is based on simple geography. Only six Florida counties out of 67 are non-coastal, according the National Oceanic and Atmospheric Administration. Conversely, that means 61 counties are in risk-exposed areas.
But McChristian and other experts, including Don Griffin, with the Property Casualty Insurers Association of America, say Florida has little to show for its heavy-handed regulatory approach. “There’s a pretty significant amount of companies that can’t charge the right price they need to in order to compete in the state,” Griffin says of Florida. “A lot of companies made a choice to not be in the market.”
Executives at Centauri Specialty Insurance Holdings, a Sarasota-based startup property insurance firm, made that choice. The firm instead focused on Louisiana — a move Griffin says other Florida firms have also made. Says Griffin: “A lot of our companies that do work in the Southeast go to
Louisiana as a state that gets it.”
In a 2011 report, “How Not to Handle Property Coverage,” McChristian wrote that Florida is alone among other states in over-relying on state-backed insurance entities, like Citizens Property Insurance Corp. McChristian, based in Tampa, recounted a panel discussion of insurance commissioners from several states in the report.
“The consensus was that no state needs to be in the insurance business,” wrote McChristian. “Florida, however, is into it deeply — up to its eyeballs with both Citizens and the Florida Hurricane Catastrophe Fund — and absent measures to curb the growth of what was intended to be the ‘insurer of last resort’ and a less-costly reinsurance facility, we may wind up submerged.”