FedNat leverages collateralized again in reinsurance renewal

by Artemis on July 5, 2017

Collateralized reinsurance markets again played a role in the latest renewal of primary insurer Federated National Holding Company (FNHC), with the firm securing a program that will provide an aggregate limit of almost $2.2 billion and a single-event limit of $1.56 billion.

Florida domiciled Federated National operates two primary insurance companies, Federated National Insurance Company and Monarch National which the Fed Nat holding company acts as managing agent for, which have both agreed to the terms of the holding company’s excess of loss catastrophe reinsurance treaties for their 2017 – 2018 reinsurance programs.

The reinsurance arrangements are designed to protect both insurance companies against property losses from covered events affecting their homeowners’ insurance portfolios.

FedNat has been a regular visitor to collateralized reinsurance markets and ILS funds, increasing its usage of the fully-collateralized coverage. It’s not clear how much of the new program utilises collateralized reinsurance, but it’s safe to assume the ILS fund sector played a key role again at this years renewal, particularly at a time when ILS funds have been growing their share in Florida.

Federated National’s excess of loss reinsurance provides coverage for both Florida and Non-Florida exposures, as the insurer has been actively expanding outside its home state. Effective July 1, 2017, the reinsurance program includes $89 million of new multi-year protection and $156 million of renewing multi-year protection from last years renewal.

The program is structured in layers, with a cascading feature so that they all attach after $25.1 million in losses for the insurer. Once one layers aggregate limit is exhausted, the next layer drops down (cascades) in its place, and any unused layer protection drops down for subsequent events until exhausted.

The company also purchased an underlying reinsurance layer providing $7.1 million of cover excess of $18 million of losses, with prepaid automatic reinstatement protection.

All of these cascading and multi-year reinsurance treaties have been placed with rated reinsurers or fully-collateralized markets which have placed their potential obligations in dedicated trusts.

The cost for the program for FedNat is approximately $180 million, with around $125 million for the private reinsurance and another $53.1 million for a 75% participation coverage from the Florida Hurricane Catastrophe Fund (“FHCF”).

In total that offers $2.19 billion of aggregate cover, with a maximum single event coverage totaling approximately $1.56 billion and puts the firms single event retention for a catastrophic event in Florida at $18 million, which is a little lower than the previous year.

Overall the costs are fairly similar to last year, but the lower retention level will help FedNat avoid as much attrition to its own funding and also perhaps result in the reinsurance layers being called on more often as a result.

FedNat has also arrange a 10% quota share on its Florida homeowners book of business, effective July 1, 2017 but excluding named storms. So this will largely be exposed to severe thunderstorms, flooding and other perils we’d imaging. FedNat has also terminated its existing two-year 10% quota share

The non-Florida coverage is much smaller, in terms of limit, as FedNat continues to seek expansion outside the state.

Meanwhile Monarch’s reinsurance programs are estimated to cost $5.17 million, with $3.23 million for private reinsurance, and $1.94 million payable to FHCF. In total the firm will have around $109.81 million of aggregate reinsurance coverage with a maximum single event limit of near $68.89 million

Again, Monarch’s reinsurance treaties for the 2017 – 2018 program have a cascading structure and also have been reinsured to some fully-collateralized markets.

For groups like FedNat, the capital markets, ILS funds and collateralized sources of reinsurance capacity are playing an increasingly important role. As FedNat and others like it seek nationwide expansion in the U.S., this role is likely to increase in importance and the capital markets share of their reinsurance programs will probably grow.

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