30-Year Plan

30-Year Plan

By Sean Roth

Real Estate Editor

It wasn't long ago that Ricardo Espino got his first true taste of risk. Espino was a quick rising insurance executive for one of the AIG companies in Honolulu when Hurricane Iniki hit the Island of Kauai. On that warm day in September, the most-devastating storm the 50th state has ever experienced killed six people and did $2.3 billion in damage. That was 1992.

Today, the 38-year-old Espino is facing $5 million in gross losses from Hurricane Katrina, another $5 million from Dennis and estimates of $40 million to $50 million in claims from Wilma. All that and Espino is still smiling - all the way to the bank.

Espino's older baby - he has a 6-month-old son at home- is the year-and-a-half year-old Universal Insurance Holdings of North America Inc. based in Sarasota. The company, which currently offers only homeowners and condo owners insurance, is already generating premiums of about $130 million a year.

By 2006, Espino plans to move into auto and boat coverage and umbrella policies. Universal Insurance isn't just sticking with Florida. The company is already in the process of opening a San Antonio office to cover Texas. From there, look for Universal Insurance to expand to Georgia, South Carolina, Nevada and Arizona. Then it's on to markets throughout the United States. All of that business is coming through a 21-person office in a growing portion of the former Arthur Andersen office space on east Fruitville Road.

Espino has been working in the insurance business since he was 21. With a bachelor's degree in accounting from University of Texas-El Paso, Espino's first job was a financial reporting supervisor for AIG Hawaii. Hurricane Iniki notwithstanding within five years, he had risen to controller there.

"I was working pretty much 24-7," he says. "but what it allowed me to do is get involved in all of the aspects of the business."

Headquartered in Sarasota

From there Espino in 1995 became chief financial officer and treasurer for Florida Select Insurance Holdings Inc. and its subsidiaries. That was when Espino really got to see the Florida insurance environment. His company's headquarters was in Sarasota. Espino, who was also chief risk manager, was responsible for overseeing the risk process and hurricane probability models for what at its high point was the eighth-largest insurer of homeowners and residential property policies in Florida. In 2001, a subsidiary of Birmingham-based Vesta Insurance Group Inc. acquired Florida Select Insurance for $64.5 million.

After that, Espino decided he wanted to start his own company. "I felt that I had learned a substantial amount and that there was a slightly different way certain things should be done," he says.

His plan was to create an insurance company based around a senior management brain trust. Essentially, the company would do more with fewer employees. He hoped to be able to attract high performers who would have first-rate skills and technical know-how.

"We would look for people in the insurance industry but maybe with no experience in Florida homeowners' policies," Espino says. "We might look at someone who worked at Alaska Pipeline insurance; someone who understands the concepts of insurance, but who may not have the specific experience; someone with the intellectual capacity to understand another part of the industry. We would look for folks on the rise rather than those who have been there and done that. We would catch them young."

Every entrepreneur's hope, right?

Espino wrote a business plan and then began the search for financing. He also started recruiting the executive team, eventually hiring three people.

The idea was seemingly popular. Espino says he had 25% of the financial commitments he needed when the re-insurance brokerage firm of Willis Re contacted him. Willis Re set up a meeting for Espino with Universal Insurance Group's executive board in Puerto Rico. The results of that meeting turned Espino's business plan on its head.

Universal Insurance executives said if Universal was going to capitalize the startup, it wanted to own it 100%.

That wasn't what Espino and his team had in mind. But he says in the end "it was really the best option. They have the reputation. Their senior-level folks are just so talented. Combined they have almost 200 years of insurance experience. They also had the financial stability."

Plus, Espino admits, the venture capital commitments he had obtained were loaded with contingencies.

Universal Insurance Group, the largest writer of personal insurance lines in Puerto Rico, wanted into the Florida market, Espino says, because it didn't have the same governmental or regulatory exposure problems of say a Latin American country, but at the same time the climate and weather issues created a natural barrier to competitors.

When the ownership plans changed, many of Espino's executive team pulled out. The sole remaining executive, Lora Rees, a former account executive for Computer Science Corp., eventually became Universal Florida's vice president of operations.

After months of planning, Universal's North American division started writing policies in May 2004. A month later, the company assumed a book of 32,000 insured properties from the state-run insurer of last resort, Citizen Property Insurance Corp. A few months later, the company assumed about 95,000 policies from Allstate Floridian Insurance Co.

Universal has also written about 45,000 new policies.

Pieces of the puzzle

So given the hurricane losses in Florida the past two years, how can Universal's North American division be profitable? It comes down to hedging its bets.

First, Universal sets much higher standards for the property it insures than most of its larger national competitors. It uses two complex hurricane probability maps not just for pricing but also for availability. Further, the company also sets tight structural-age limits, avoiding the oldest buildings.

The company also limits it exposure in one market to about 3%; in Florida that translated into a top limit of 150,000 policies.

"Once you get beyond a certain size you can't manage your exposure," Espino says. "There's really no secret to it, but we - like a lot of other people - are targeting new home construction. We try to write a large percentage of our coverage in new neighborhoods."

On top of that, Universal buys a lot of reinsurance. According to Espino, in the case of hurricanes, Universal has a $1.25-million deductible per hurricane, which provides the company with about $500 million worth of coverage.

Universal's North American office also makes heavy use of outsourcing. Universal hired the Sunrise-based companies of MacNeill Group Inc. and Insurance Servicing Adjusting Co. to handle underwriting and claims services. Universal has no paid sales people; the company relies on independent agents and a relationship with Allstate's brokers to get policies in the hands of potential customers. This allows Espino to focus on strategy and growth.

But Espino says Universal watches its partner companies much closer than was done at his prior employers. "We have line managers who monitor them on a day-to-day basis," he says. "We have taken the decision-making away from a lot of the third-party administrators. We have chosen instead to have our management staff embedded in the staff of our partners. This gives us the ability to influence everything."

Finally, Universal tries to maintain a target for premium rates in the middle to upper-middle of the market. "We would love to be in Jacksonville," Espino says. "But we are seeing too much competition there, and we are not going to cut our rates to compete."

Bottom line

Universal broke even last year - a year and a half in business and even after startup costs. The company expects a profit of $3 million to $5 million this year; at the same time it's increasing its surplus by $15 million to $25 million.

The company recently opened its Texas office (Universal Insurance Co. of Texas). Espino has a five- to seven-year plan to expand into neighboring states and eventually into California.

"I want to be one of the dominant regional carriers not just in Florida," Espino says. "I want the same type of reputation afforded us that Universal in Puerto Rico has. I'm just two years into my 30-year plan."