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Insuring the Worst: An Interview With Severe Weather Property Insurer Doug Raucy Pt. 1

Talking to a small-cap insurer

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Jan 04, 2017
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Tim Melvin: Alright, we’re on today with Doug Raucy with 1347 Property Insurance Holdings Inc. (

PIH, Financial). How are you this morning, Doug? Thanks for spending some time with us on what is kind of a dreary morning here in central Florida.

Raucy: Yea. Doing great. Thanks.

Tim Melvin: You’re a small cap insurance company that is kind of off the radar screen. Can you tell us a little bit about the company?

Raucy: I started the company back in 2012 in Louisiana. We initially did a depopulation of wind and hail only policies because our strategy is really focused on wind and hail on the coast and supplementing that with homeowners and manufactured homes, dwelling fire policies more inland, and we were able to make that strategy work for us in Louisiana.

Then we complement that with homeowners and dwelling and fire, which is rental type properties and then some manufactured homes in and around the rest of the state. We write that through independent agents. The strategy worked well. One of the issues behind the strategy, of course, is we want every line to be profitable, so that mixture of policies is really important for us because we don’t want to expose the entire book to any one certain kind of peril.

Around mid-2014 we decided to take the company public. The main thinking behind that was just to make sure we had the capital to fuel our growth. One of our commitments to our agents is that as long as they kept giving us good business, we would not limit them in any way.

Tim Melvin: Just for the reader who’s not really familiar with the insurance business and the nuts and bolts, could you explain the concept of depopulating for them.

Raucy: It’s interesting. A lot of the states in coastal areas will form what they call a residual market, or a market of last resort for people who cannot get insurance in the private market. So it’s actually government-run insurance for homeowners that the private market will not insure because of certain risks. The private market goes in and out, and the definition of what that is changes all the time.

Really, it’s just a place for people who have a nice home right on the coast that can’t get insurance for in the private market. They need a place to get insurance, so what a lot of states have done is started these state pools to capture all these high risks. They are set up as nonprofits, but they are really a place for what we call residual, or high risk policies to go into.

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Tim Melvin: The phrase “high risk” brings me to what I think is going to be the biggest question on a lot of investors’ minds when they look at the company. You’re writing hail and wind insurance and homeowners insurance in areas that have a lot of hail and wind and storm damage. Isn’t that a really high risk business model?

Raucy: I think it is one of the things we do is we carry the proper amount of reinsurance. And for those people who don’t understand reinsurance, it's the concept of us insuring ourselves against what we consider to be frequent or severe storms.

So we will carry so much of the risk on our books, and then we will cede the rest of it off to a reinsurance company for a fee. Most of those are offshore, but some of them are domestic. That’s been a very healthy market because, honestly there have not been a lot of global events to drive capital out of that market. Reinsurance costs have continued to come down, which has really helped us to thrive.

But the concept is that we carry x amount of risk ourselves based all of our modeling and all our formulas if we know that we could have a year similar to, say, 2016 where the weather hit us pretty hard. Still, we are still are probably going end the year somewhere around a small loss or breakeven point.

So it just goes to prove to our investors that the model that we have set up shows that when we do get events, whether it be multiple or large events, we’re probably going to have about a breakeven year. Then the years that we do not get events we’re going to do very well, which to us would be a 15% or above return on equity in quiet years. So far it’s been about one storm every year for the past four years that we’ve been involved and we think that’s probably about normal.

Tim Melvin: Okay, and as long as that ratio is kind of three or four good years to one year with a whole bunch of storms holds, this could actually be a very high return business.

Raucy: Well, years like 2016 are very rare. We renew our reinsurance on June 1st to coincide with hurricane season, but last year we had an event prior to June 1st. We got hit pretty hard there and went through a full deductible.

It’s very unusual that you’ll go through two of those in one year. So we’ve got it figured out that if we go through one [storm] in one calendar year, we’re certainly going to be profitable.

Click here for part 2.

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