Florida market in midst of inevitable hard-landing: Elementum’s Rettino

Florida’s property insurance market is in the midst of an inevitable hard-landing, but the legislative reforms passed recently are unlikely to go far enough and won’t solve the fundamental problem of litigation, according to Tony Rettino of ILS fund manager Elementum Advisors.

Rettino, a Founding Partner and Senior Portfolio of Elementum Advisors, LLC, the insurance and reinsurance linked asset manager, was speaking at the investor day of key backer White Mountains Insurance Group last week.

Rettino provided some insightful commentary on the state of Florida’s property insurance market, as well as what the situation has meant for his firm’s appetite to assume risk and provide reinsurance capital to the state.

Asked to begin with his thoughts on the Florida reinsurance renewals, Rettino said, “There’s nowhere to go but up if we start in Florida.”

He continued, “Looking at Florida, it’s a mess, right. Unfortunately we are in the midst of the hard-landing that was inevitable after years of neglect by the legislature, by rating agencies and others in the market.”

Moving on to describe the legislative reforms and how Elementum views them, Rettino said the company has “mixed” opinions as to their likely success.

“In the last two years the legislature has genuinely tried to address certain bad behaviours of the market.

“However the focus of legislation continues to be on the abuses of the past and trying to address what’s happening over here, but you’re not changing the incentives that create that environment in the first place,” he explained.

Litigation is the “fundamental problem” of the Florida property insurance market and the biggest driver of its reinsurance capacity issues, leading Rettino to state, “If you’re not addressing that and if you’re not controlling that, you’re not really doing anything.”

He went on to explain that just because the Florida market is in a mess, does not mean there aren’t investment opportunities.

As we reported earlier this week, Rettino also discussed his firm’s continued success with its higher-yield ILS fund strategy at the investor day.

Expanding on how the Florida market has proved relevant to this venture, Rettino said, “We have had a very measured and intentional approach to Florida. We have raised opportunistic capital over the last couple of years, to invest in the most disrupted part of the market, which is the higher-risk end of the spectrum, and is offering significantly higher risk-adjusted returns, more than double versus five years ago.

“So we’re fortunate to have a couple of investors that have leaned into that environment, and that’s not just for Florida.”

But the ILS investment manager remains selective and Elementum’s underwriting team have been focused on ensuring the quality of its reinsurance partners in the state.

“We’ve actually reduced the number of companies that we’re supporting in Florida, because there’s a significant deterioration in their infrastructure, in their financial conditions,” Rettino said.

“So we just think there’s fewer good quality people to invest in. We think that we’ve already seen eight companies go out of business in the last year, there’s probably another three or four that should follow them.”

Looking forward, Rettino does seem some cause to be positive about the Florida insurance market’s future and a lot of that is currently to do with rising appetites of larger and more established insurance carriers to be more active in the state again.

“We are encouraged by some of the larger companies that were somewhat dormant that are starting to lean in, and so that is a positive for the market, to have better well-capitalised companies with good infrastructure and good discipline participating, that’s ultimately good for the market,” he said.

Historically, a lot of the major US carriers have backed away from Florida’s property insurance business, partly as they felt they could not secure the pricing their coverage products warranted.

But now, with rates significantly higher, there are signs of some national players venturing back to Florida, which would improve the overall standard of reinsurance ceding companies in the state and also offer Florida risk back within some nationwide programs as well, which could be attractive to some ILS markets if that becomes a trend.

Also read: Elementum raises for high-yield ILS strategy, positive on investor pipeline: Rettino.