Collateralized market key in United reinsurance renewal

Property casualty insurance holding company United Insurance Holdings Corp. (also known as UPC Insurance) has released details of its June 1^st reinsurance program, which shows that the collateralized reinsurance market played a key role in the firm’s mid-year renewal.

For the treaty year, effective June 1^st 2016, UPC Insurance secured $1.52 billion of reinsurance protection, excess $10 million, which the insurer says provides cover for a 1-in-100 year hurricane event, and a second 1-in-50 year hurricane event in the same year.

For the 2016 contract year, UPC Insurance opted for 45% participation rate with the Florida Hurricane Catastrophe Fund (FHCF), a mandatory layer that the insurer states will provide roughly $354 million of aggregate protection for losses in excess of $246 million.

Interestingly, UPC Insurance reveals that it also opted to purchase FHCF replacement cover from private reinsurers for the remaining 45%, which provides another $346.2 million of fully collateralized aggregate reinsurance protection, in excess of $244.2 million, for Florida only.

That UPC Insurance chose to obtain 45% replacement FHCF cover on a fully collateralized basis, instead of electing a higher participation rate with the FHCF, shows how the collateralized and insurance-linked securities (ILS) market can help primary players reduce their reliance on the FHCF.

The collateralized reinsurance marketplace remains one of the fastest, if not the fastest growing sub-sector of the ILS space, and with primary players like UPC Insurance increasingly utilising ILS solutions and the sector’s investor-base, further growth is likely.

In addition to its mandatory FHCF cover and the fully collateralized replacement FHCF protection, UPC Insurance also purchased an additional $685 million of aggregate catastrophe reinsurance cover, excess $10 million, from 55 private reinsurers and cat bond investors.

Each of which either have an A- or higher financial strength rating from A.M. Best, “or have fully collateralized their maximum potential obligations in dedicated trust for the benefit of UPC Insurance,” said the firm.

UPC Insurance is clearly comfortable utilising ILS capital and structures to support its reinsurance program, highlighted by the key role collateralized reinsurance played in its June 1^st renewal, and also the recent issuance of its first catastrophe bond, Laetere Re Ltd. (Series 2016-1).

The $100 million transaction, which is comprised of three tranches of notes, provides the firm with reinsurance protection against U.S. named storms and earthquakes for a one-year period.

As a result of UPC Insurance’s first entry into the catastrophe bond marketplace, the firm states that it added 18 new cat bond investors, while the entire 2016-2017 catastrophe reinsurance program saw reinsurer participation expand to 37.

Although it wasn’t mentioned in the reinsurance program filing, UPC Insurance’s use of collateralized reinsurance protection brings to mind Promissum Re, a collateralized reinsurance facility launched by the firm in 2015.

However, the sidecar or fully-funded captive reinsurance type vehicle, which is fully collateralized by third-party ILS market investors, isn’t discussed in the firms June 1^st reinsurance program filing meaning that it could be an additional source of protection or risk-sharing, which would further increase UPC Insurance’s utilisation of the collateralized and ILS market.

UPC Insurance highlights that it purchased more severity protection than seen in any previous year. It’s overall reinsurance program exhaustion point sits at $1.52 billion with first event cover of $1.42 billion, which UPC Insurance says is equivalent to the 1-in-204 year return period.

Group retention is $10 million per-occurrence in all states, says UPC Insurance, with wholly owned captive UPC Re retaining $20 million excess of $10 million for a first event, “with all other layers cascading down to $10 million for second and subsequent events,” explained the firm.

UPC Insurance estimates that its 2016-2017 catastrophe reinsurance program cost $191.5 million.