Heritage Insurance Holdings, Inc., Florida headquartered parent to Heritage Property & Casualty Insurance, has reduced its reliance on using the Florida Hurricane Catastrophe Fund (FHCF) thanks to the successful completion of its latest catastrophe bond, Citrus Re Ltd. (Series 2016-1).
For Floridian primary insurance companies one of the compelling reasons to access the catastrophe bond market is as a supplemental source of efficient reinsurance capital that can help them to lower their reliance on the FHCF coverage.
Typically insurers utilise the FHCF as a source of capacity that reimburses them for a portion of their catastrophic hurricane losses, paying into the fund in order to maintain their participation and be covered when events occur.
Heritage has been utilising the capital markets and its fully-collateralised reinsurance protection from the Citrus Re catastrophe bonds as a way to reduce its participation in the FHCF, thereby lowering the cost of its protection by leveraging efficient, multi-year ILS capital.
Last year Heritage said that its $277.5m Citrus Re Ltd. (Series 2015-1) catastrophe bond helped it to reduce its participation in the FHCF to 75%, down from the 90% more typically used by most Florida domestic insurers.
Now, the insurer has reduced its participation even further, lowering it to 45% with the help of the $250m Citrus Re Ltd. (Series 2016-1) transaction.
Heritage CEO Bruce Lucas explained; “We recently closed on a $250 million catastrophe bond that will drop our Florida hurricane catastrophe fund participation to only 45% and will lock in favorable rates for the next three years.”
So Heritage has halved its participation in the FHCF with just two cat bond issuances over the course of a year. Last year the firm said that across a multi-year cat bond deal the coverage provided by its cat bonds come in at an average rate that is below the cost of the FHCF coverage it replaces.
A good example of the capital markets helping insurance companies to become more capital efficient, leveraging the multi-year structure of cat bonds to reduce reliance on a state-backed fund. In the long-run that is good for the state and its taxpayers too.
Last year Lucas said that part of the reason Heritage had for seeking to reduce its reliance on the Florida hurricane cat fund was the fact that the FHCF had decided to buy its own reinsurance protection in 2015.
He cited a fear that the FHCF could pass on rate increases to participating insurers in order to pay for its private market reinsurance protection, perhaps providing further stimulus to return to the cat bond market in 2016.
With ILS capacity and the capital markets providing a way to reduce participation in the FHCF we will likely see an increasing number of Floridian domestic insurers looking to cat bonds in years to come.
It’s not always been a successful venture though, as was seen recently with Safepoint’s latest Manatee Re Ltd. (Series 2016-1) catastrophe bond seeing one tranche, which looked to be an FHCF replacement layer, fail to be issued.
So clearly not every effort to reduce FHCF participation has been a success, but we are likely to see increasing efforts to do so. With the potential for a more active hurricane season for Florida in future years, as the current El Nino wanes, putting money into multi-year coverage with cat bonds at this time is a sensible strategic move for insurers.
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