Assurant may look to cat bonds and collateralized reinsurance again

U.S. specialty insurance group Assurant has been an end-user of capital markets third-party backed reinsurance capacity for some time, through its catastrophe bonds and use of collateralized coverage. In 2014 Assurant may look to the capital markets again.

After its mid-year 2013 reinsurance renewals had been completed Assurant said that catastrophe bonds and collateralized reinsurance were increasingly playing a part in its reinsurance program, helping it to diversify its sources of risk capital and to expand its reinsurance coverage by 20% last year.

After such a successful result in 2013 it is no surprise that Assurant places the capital markets firmly on its list of reinsurance sources for 2014, with both cat bonds and collateralized cover potentially playing a part in its key renewal at the middle of this year.

Assurant’s top executives discussed the current reinsurance market climate in the firms fourth-quarter earnings call. Chief Investment Officer of Assurant Christopher J. Pagano, said; “The absence of any significant cats in 2013 and equally importantly additional capacity from the capital markets has produced some very favorable reinsurance pricing conditions.”

These favourable pricing conditions could result in a significant drop in reinsurance renewal costs for Assurant. Pagano continued; “You know we’re looking at ballpark roughly 15% drop on a risk adjusted basis.”

Pagano said that a portion of the reinsurance program has already been placed and highlighted that its two existing catastrophe bonds, $130 million issued in January 2012 by Ibis Re II Ltd. and $185 million issued in June 2013 by Ibis Re II Ltd., provide it with multi-year collateralized coverage.

Assurant will go back to the reinsurance market in June, as it has done for the last few years, looking to renew a large portion of its reinsurance protection. Multi-year covers will be firmly on the agenda for Assurant alongside its cat bonds, Assurant has also secured multi-year reinsurance protection both on a traditional and collateralized reinsurance basis previously.

Pagano explained what Assurant would be looking at in June; “Where we’re seeing some additional flexibility is the willingness to provide multi-year coverage on an indemnity basis and then some flexibility around reinstatement premiums. So those are the main factors. What we’re seeing is the by-product of the additional capacity in the reinsurance market and we’re going to factor all that in.”

Robert Pollock, President and CEO at Assurant, stressed the importance of securing multi-year protection in a time of lower rates, saying; “Our fundamental belief is that at some point in time the market will harden when there are some events and we’re trying to get multi-year coverage so that we’re protected with favorable rates.”

That could suggest that catastrophe bonds may be a strong feature in the 2014 reinsurance renewal for Assurant, if it can secure a signficant drop in cat bond rates and satisfy its need for reinstatements through its traditional reinsurance buy. Multi-year fully-collateralized reinsurance will also likely be attractive to Assurant in satisfying this desire to lock in pricing.

Looking at Assurant’s 2013 reinsurance program structure (in the graphic below), it’s clear that the insurer may attempt to insert some multi-year cover into the lower two layers. Given the attractive pricing on both cat bonds and collateralized protection, as well as capital market investors greater willingness to take on risk with higher expected losses, it would make a lot of sense for Assurant to add some multi-year protection into the lower layers of its tower.

Assurant’s 2013 catastrophe reinsurance program structure, showing its catastrophe bonds and collateralized covers

Price and duration, however, will not be the only factors on Assurant’s mind when completing its 2014 reinsurance purchases. The insurer begins designing its program thinking about the risk protection that each component provides, so any more cat bonds or collateralized cover that Assurant buys may include some expansion of terms compared to its existing covers to increase protection, something seen in a number of recent cat bond deals.

Pagano explained; “We always start with obviously the risk protection and then once we’re comfortable with that then that’s where you can play at the margin with the trade-offs between the rates and pricing. But we always start with that risk management focus on our reinsurance line.”