As climate changes, FTV seizes opportunity with flood insurance

FTV and Bregal Sagemount are taking a minority stake while Neptune CEO and the management team return a majority ownership.

The rising risks of flooding in certain parts of the country, together with coverage shifting from the federally subsidized National Flood Insurance Program (NFIP) into the hands of private players, are among factors driving demand for flood insurance, FTV Capital partner Mike Vostrizansky told PE Hub.

The San Francisco based FTV, alongside New York headquartered Bregal Sagemount, recently took a minority stake in Neptune Flood Incorporated, a digital insurtech platform and private flood insurance provider based in St Petersburg, Florida.

Neptune was launched in 2018 to provide flood insurance policies to more than 150,000 homeowners, renters and businesses in 48 states and Washington, DC, the company said. Neptune’s chief executive Trevor Burgess and the management team are retaining majority ownership.

“This industry has just been very under-adopted historically, [and] only 13 percent of homeowners in areas that should have flood insurance have flood coverage,” Vostrizansky said.

To cover homeowners against flooding, the government in 2012 enacted the Biggert-Waters Flood Insurance Reform Act. Over the years, the NFIP has been covering most of the market but there have been some changes to promote private participation.

NFIP is using Risk Rating 2.0, a new method for calculating flood insurance rates based on a unique combination of rating variables for each property to reflect its flood risk, according to Federal Emergency Management Agency (FEMA).

Among the changes that NFIP is bringing, Vostrizansky said more private players are entering the sector, an opportunity that  FTV started to explore.

Mike Vostrizansky, FTV Capital

“We saw some legislation that’s passed over the last decade which has caused that trend to start,” he said, referring to private players, “and we still think that’s very much in the early innings, as we said to ourselves, with NFIP enabling this private market to flourish and grow, ‘Who are the companies that are best positioned to win that share?’”

With this thesis, FTV finally joined hands with Sagemount to invest in Neptune while Neptune was also looking for a partner who can stir its next stage growth.

However, NFIP is often used as the insurer of last resort to protect people who have no other option to get insurance and not as “the preponderance of the market.”

“The program has certain limits that only go up to $250,000, which is below the price of most folks’ homes in the US and so at that level, they [NFIP is] just a less efficient coverage option, said Vostrizansky.

Vostrizansky said FTV has a global partner network, relationships with large reinsurers, brokers and agent networks, that can help the company reach this goal. “We can drive those partnerships faster by getting Trevor in front of the right people at the right time when they are ready to make decisions.”

Severe weather conditions in certain parts of the country, because of climate change, are also adding to opportunities for flood insurance business. Vostrizansky said there has been an underinvestment in this market historically.

“However, with some of these changes due to climate change, awareness continues to increase and these [severe weather] events continue to be more severe, so people recognize that this protection is something that would be valuable to them,” he said.

Neptune can scale by organically using its edge with a network of brokers and advanced technology for underwriting, adding a more thoughtful aggregation model for placing, among other strategies.

The company uses its own Triton AI, which is the underwriting application it built internally for assessing risk and pricing risk.

“We see a shift from public market to private market as creating a really attractive tailwinds for five to 10 years or even more years after our investment period.”