Undaunted by Florida's climate, new insurer taking root
-Bradenton Herald http://www.bradenton.com/mld/bradenton/business/15220626.htm

TED MASE/Special to The Herald
John C. Laurie, right, chief operating officer and Principal of WGB, and Wayne Fletcher, President and chief executive officer of Northern Capital, together Monday at Wyman, Green & Blalock, Inc. in Bradenton.

Wayne Fletcher is accustomed to the typical response he gets when introducing himself as the president and CEO of a start-up insurance company that's about to begin writing property and casualty policies in the state.

"Are you crazy?" people ask him. "You're in Florida."

But those skeptics aside, Fletcher is excited that he will see Miami-based Northern Capital Insurance ink its first policy sometime this week. It is one of 24 new insurance companies that have entered the state since the beginning of 2005, according to the Florida Office of Insurance Regulation.

The company, with about $8 million in surplus capital, will take the slow-and-steady approach to building its policy base, Fletcher said.

"We're going to build up slowly. We're not just going to go out and offer policies throughout the whole state," he said, during a stop Monday in Bradenton. "We're going to focus on 10 counties in the southern third of the state initially."

And there's a chance one of the first policies could be written in Manatee County.

John Laurie, principal with Wyman, Green & Blalock Inc. Insurers in Bradenton, is one of about 10 agents in Northern Capital's 10-county footprint who will initially be offering the policies. He also sits on Northern Capital's board.

"I was very eager about getting involved in starting an insurance company," Laurie said. "It's (the organizational process) been frustrating. We kept saying, 'Are we ever going to get there?' "

The company's first hurdle was obtaining reinsurance.

Reinsurance is insurance for insurance companies. It is difficult to obtain in the Sunshine State because of the high dollar amount of claims paid out over the past two storm years and the amount of potential damage claims reinsurers are currently exposed to in the state.

In May, Fletcher said, he laid out Northern Capital's business plan and risk model to reinsurers in New York and Bermuda. He also spoke to representatives of various Lloyd's of London syndicates.

The fact Fletcher had a past working relationship with Lloyd's of London played to Northern Capital's favor, he said.

After some negotiation, Northern Capital was able to get reinsurance from the syndicates and a New York-based reinsurer.

The reinsurance obtained by Northern Capital requires it to pay out only $1 million per hurricane in an arrangement that's similar to an insurance policy deductible. The remainder of the damage claims Northern Capital incurs per storm in claims is paid by the reinsurers.

"That allows us to withstand two or three storms per season," Fletcher said.

But that reinsurance coverage doesn't come without a price.

From Aug. 15 to Oct. 31 of this year, Northern Capital will have to pay $2 million for its reinsurance.

"Now to give you an example of how expensive that is, we will have written in that time, $2.5 million in premiums," Fletcher said. "And on top of that, if we have a hurricane in that period of time, we'll also have to pay out a million dollars. It's very expensive and that's where the consumer, the homeowner, doesn't understand. They look at 'the dirty, mean insurance company.' "

Planning, with patience

Fletcher said the first few months of operation could be a little touch and go, given the state's storm record of late.

But Northern Capital's fiscal picture will improve once hurricane season ends and the company continues to build its policy base, Fletcher said.

"It allows us, by starting now, to build that book of business so we can spread that risk and have several thousand homes insured by hurricane season next year," Fletcher said. "Next year we'll be able to spread our risk out by writing policies on the East Coast and the West Coast of the state."

Fletcher said Northern Capital plans to write policies on 5,000 to 6,000 homes in the first year of operation.

Within five years, the company anticipates maintaining $80 million to $100 million in policies on 25,000 to 30,000 homes.

Northern Capital won't be able to take any profits - assuming there are any - until after its third year of operation because of state regulations, Fletcher said.

The state also limits insurance companies' profit margins to 3.7 percent to guard against overcharging homeowners, Fletcher said.

But any profits the company sees in the first few years of operations would be reinvested in the company anyway, he said.

Northern Capital will limit its risk by insuring newer homes built to modern building code standards, primarily in the $400,000 to $700,000 range, Fletcher said.

"Our philosophy is, initially, we're trying to provide (policies to) those people who want to buy these newer homes in these golfing communities along I-75 and I-95," Fletcher said. "They're not living in $2 million homes on the water. They're living in $500,000 homes along the interstate."

Under scrutiny

Once reinsurance was obtained, Northern Capital also had to convince Florida insurance regulators that the company had sound underwriting backers.

That proved to be a hard sell, Fletcher said.

"They (the Office of Insurance Regulation) didn't believe we could get it (reinsurance)," Fletcher said. "Because there are other companies in Florida that can't get it."

Fletcher said the Office of Insurance Regulation required Northern Capital to provide the actual written reinsurance policies before allowing the company to begin writing policies in the state.

The agency also required detailed information on the company's officers.

"They even challenge you if you have a speeding ticket on your record," Fletcher said. "You have to justify that to the (Office of Insurance Regulation)."

Bob Lotane, a spokesman for the Office of Insurance Regulation, makes no apologies for the thorough scrutiny.

With $36 billion in insured losses from eight hurricanes in the past two years, the Florida market can be tough for homeowners and insurers, Lotane said.

"We want to make sure that the companies are financially solvent and the officers have not had any troubles in other states or in Florida in the past, and they know what they are doing," Lotane said. "That being the case we take our standards very seriously. We want to make sure that when people put their money into this insurance company their claims are going to be taken seriously and they are going to be paid."

Despite the past two years of storms, Lotane said "we've had pretty substantial interest in entering the state, which is good news. We're glad to have them (Northern Capital), we're glad they made it through and we're glad they're doing business here."

Old-school approach

Northern Capital took a grassroots approach to raising capital, with the idea in mind that it would be able to offer a more "old-fashioned," personalized service to its customers, Fletcher said.

"We did it through friends, acquaintances and board members," Fletcher said. "We did it the good old-fashioned way of $100,000 at a time from investors. We didn't want someone sitting on a board in some far-away city telling us what to do."

As an agent, Laurie said he's excited about being able to offer clients another option for insurance besides Citizens Property Insurance Corp., Florida's insurer of last resort.

As an investor, Laurie's long-term vision for Northern Capital is to see the company become a multistate player in the property and casualty insurance business.

He thinks the company's business model of careful growth and insuring only newer, well-constructed homes will help that vision come to fruition.

"Our real risk is the first two years of hurricanes," Laurie said. "Once we get beyond that first two years we will have built up adequate surplus to be able to withstand some big hits."