Florida Citizens takeout insurer Heritage Insurance Holdings reaped the benefits of being a first time catastrophe bond sponsor this year, with its two cat bond issues through Citrus Re Ltd. lowering its cost of reinsurance protection.
Heritage has fully embraced the use of fully-collateralized reinsurance capacity and alternative capital in 2014 as it secured $200m of protection from insurance-linked securities (ILS) investors through its two Citrus Re cat bond issues.
The firm first came to the cat bond market in March with the $150m Citrus Re Ltd. (Series 2014-1), before quickly following up to secure another $50m of cover with its second takedown from the Citrus Re vehicle, Citrus Re Ltd. (Series 2014-2).
Heritage reported a big decline in the ratio of its premiums underwritten to premiums ceded, at the same time as ceding much more of its risk. The firm reported its ceded premiums as a percentage of gross premiums earned at 30.5% in Q3 2014, compared to 47.5% for Q3 2013.
“This decrease is primarily due to favorable reinsurance market conditions and the lower cost of reinsurance associated with the issuance of $200 million of CAT bonds by Citrus Re,” the firms results statement explains.
This effectively means that the firm held onto much more of its underwriting profit, thanks to the lower-cost of ILS capital, an important benefit to any primary insurer but particularly to one which is looking to grow, as Heritage has been.
This is exactly why primary property insurers are increasingly becoming first time catastrophe bond sponsors, a trend which we expect to continue into 2015. We’ve seen a number of Florida focused players benefit from their first cat bond issuance in recent years and this trend is expected to spread as ILS capital remains at or near these extreme low prices.
Even if we saw a major loss event, like a Florida hurricane, there is an expectation that ILS capital will continue to undercut the traditional reinsurance markets for some of these peak catastrophe zones. At the same time the ILS market is constantly striving to reduce the cost of sponsoring cat bonds and to make the process lower friction. That makes cat bonds an increasingly attractive proposition for companies like Heritage and its competitors.
There is also an element of education needed, to broaden the understanding of catastrophe bonds among primary insurance company reinsurance buyers. Here brokers need to be truly capital agnostic, something which in reality they have only become in the last couple of years. As the understanding of ILS and alternative capital grows the volume of cat bond issuance from primary insurers will likely increase with it.
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