United’s Q1 losses to exceed retention on aggregate cat reinsurance

Property casualty insurance holding company United Insurance Holdings Corp. (also known as UPC Insurance) said today that it expects that catastrophe losses suffered during the first-quarter of 2016 will exhaust the retention layer on its aggregate catastrophe reinsurance layer.

United swapped its per-occurrence catastrophe reinsurance program for a new one-year aggregate excess of loss reinsurance program, at the January 2016 renewals. It’s already looking like that will pay off, as attritional losses from convective and winter storms are set to result in some of the claims being passed onto United’s reinsurers.

Today, United announced estimated gross catastrophe losses from the first-quarter of approximately $15 million before tax. The losses include more than 800 claims from tornadoes, hail storms, winter storms and other severe convective storm events, which affected the insurer in Florida, Louisiana, Massachusetts, Rhode Island and Texas during the first 3 months of the year.

The new aggregate reinsurance treaty has a retention of $15 million, which United now says it “expects to exhaust for the events that took place during the first quarter of the year.”

That leaves the remaining $20 million of coverage, from this aggregate reinsurance contract, which being above the retention means all future qualifying losses from catastrophe events, excluding any losses from named storms as the insurer has other reinsurance coverage to deal with that, that United suffers will be passed onto its reinsurers.

So United’s situation is certainly evidence that insurers are eating into these aggregate layers of protection, some of which may have backing from insurance-linked securities (ILS) funds and investors, participating on a collateralized basis.

With losses from convective storms and hail continuing into April, as we wrote earlier about another storm hitting Texas, and the severe thunderstorm season really only just beginning, there is the potential for further attrition to aggregate reinsurance layers as the year progresses.

For United, having the $20 million of above retention reinsurance cover remaining doesn’t actually sound like a lot, at least if convective events continue at a similar rate. But it will provide the insurer with a useful capital buffer and we’d expect that after a positive experience with the switch to an aggregate cover in 2016, the insurer could increase the size of this placement next year.

For the ILS market this demonstrates that losses from attritional weather catastrophes in 2016 are already likely to eat into some reinsurance layers, above retention, a trend that can only be set to increase as the convective season continues.

It will be interesting to see how these attritional U.S. catastrophe losses from Q1 affect other insurers and reinsurers when we enter the reporting season over the next few weeks.