Universal Insurance: Navigating Florida’s Insurance Crisis

The insurance market in Florida is a real mess. Excessive litigation, fraudulent claims and an upsurge in catastrophic weather have left insurers struggling to stay afloat. Universal Insurance Holdings (NYSE: UVE), the Sunshine State’s largest home insurer, finds itself in a peculiar situation. Many insurers have gone bankrupt or left the state altogether, and even UVE is reducing its active policies.

There is hope on the horizon as Governor DeSantis signed three insurance reform bills into law. At first glance, the sentiment in the industry is positive. With the worst apparently behind it, UVE is better positioned than rivals like Heritage Insurance (NYSE:HRTG) to capitalize on the market distress.

Last year, 6 property insurers in Florida went bankrupt, signaling chaos in the industry. While one would assume that Hurricane Ian and the associated high risks of catastrophic weather in Florida are the main culprits, the main problem is excessive insurance litigation and fraud.

Florida has unusual insurance laws that encourage fraudsters and lawyers to sue insurance companies. And if insurers lose the case, they often have to cover the plaintiff’s legal fees, leading them to settle even dubious claims to avoid additional costs. This practice, the abuse of benefits, has wreaked havoc in the industry.

Although it accounts for only 7% of home insurance claims nationwide, Florida accounts for 79% of property insurance lawsuits. The situation is so dire that many major insurers are adamantly refusing to write new policies in the state. As a result, property insurance rates in Florida have increased by 50% over the past four years. They should increase again by 40 to 50% this summer.

To combat the crisis, Florida Governor Ron DeSantis took aggressive action, signing three insurance reform bills into law last year. These bills are primarily intended to curb overinsurance litigation.

Although it is still early to determine the long-term impact of the legislation, executives at Universal Insurance Holdings are optimistic. CEO Stephen Donaghy told investors on a recent conference call:

“We are grateful to state officials for passing significant reforms during the recent special legislative session, including eliminating one-way attorney fees and assignment of benefits, shortening the filing one-year claims and taking steps to reduce the competitiveness of Citizens, among other measures.

As Florida’s largest property and casualty insurer, Universal Insurance Holdings’ business is all about assessing risk better than the industry and finding the right balance between competitive pricing and profitable policies. It can be a game of feast or famine in a highly volatile insurance market like Florida.

And despite the past few years presenting challenges for UVE and the industry as a whole, the company continues to collect more premiums each year, even as it reduces the number of policies in force:

Source: FY22 Investor Briefing

However, UVE has suffered considerable losses in recent years due to even greater than normal volatility in the Florida insurance market. The stock’s book value fell from a high of $15.13 per share in 2019 to $9.74 in fiscal 2022. Worse still, the devastating impact of Hurricane Ian resulted in a massive loss of $72 million for the company.

Signs of improvement are emerging, as UVE reported net income of $25 million in the fourth quarter of 2022, its best quarter since the first quarter of 2021. And management is talking as if the worst is in the rearview mirror, as l said Steven Donaghy. “It will take time for the reforms to benefit the bottom line, but we believe that the actions of the legislator will restore the health of the market in the long term.” during a fourth quarter earnings conference call.

The stock market shares Donaghy’s optimism. Following the release of UVE’s Q4 report late last month, the stock jumped 53% in just a few weeks. Currently consolidating in a relatively tight range, the stock looks set for a potential break above the $19.71 high. Keep a close eye as the situation continues to unfold.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.