United puts gross hurricane losses at up to $600m, to retain $83m

Property and casualty insurance company United Insurance Holdings (UPC Insurance) is set to make a significant call on its reinsurance providers, reporting that its gross losses from hurricanes Harvey & Irma are estimated at up to $600 million, but after reinsurance it expects to retain just $83 million of the loss.

UPC Insurance has a large reinsurance program, featuring a significant participation from some collateralized players and ILS fund managers.

In fact, the insurer revealed earlier this year that 70% of the open market limit placed during its June 2017 reinsurance renewal was placed on a fully-collateralized basis.

The company has already seen the benefits of its aggregate reinsurance program this year, after losses from severe weather and thunderstorms ate through the aggregate retention layer.

But with reinsurance protection up to a $2.8 billion program exhaustion point, UPC has plenty of coverage to absorb the impacts of the major hurricane season and its reinsurers are set to bear the majority of the catastrophe burden.

UPC Insurance said yesterday that it estimate gross losses from hurricanes Harvey and Irma will be somewhere between $300 million and $600 million, but that it expects the retained costs to the company to be $83 million before tax (around $54 million after tax) following its expected reinsurance recoveries.

UPC’s estimate includes its losses at American Coastal Insurance Company, the insurer it acquired earlier this year. The insurers catastrophe excess of loss reinsurance coverage limits its retention to $81 million across the two hurricanes, but the retention has been limited further to $73 million by its quota share reinsurance arrangement.

The 20% quota share reinsurance was a new arrangement entered into earlier this year and reinsurers backing it included ILS manager Nephila Capital and Greenlight Re.

So Nephila will be paying a portion of UPC’s claims from the hurricanes, as well as the other collateralized participants in the reinsurance program, suggesting the capital markets will support United in paying a large amount of its final hurricane bill.

UPC also has its own reinsurance vehicle, Blueline Re a Cayman protected cell vehicle with which it enters into quota shares. It’s not clear who capitalises Blueline Re, but given United’s history, having had its own collateralized sidecar vehicle Promissum Re, it’s posisble Blueline is also third-party capitalised.

UPC said that Blueline Re, which has a separate reinsurance program for its commercial excess and surplus lines property business, will likely hit its $5 million retention for each hurricane, which takes the maximum group pre-tax retained loss from the hurricanes to $83 million.

“The strength of our capital structure and reinsurance program was proven by the cat events that have occurred in 2017,” commented John Forney, President and CEO of UPC Insurance. “We have had two Cat 4 hurricanes make landfall in our two largest states and experienced a full retention on our non-hurricane catastrophe reinsurance program. Yet, we have at least $2.2 billion of reinsurance remaining for future cat events and, depending on how things go in Q4, a chance to be profitable for the year. We’re focused on serving our policyholders needs now, and building on this financial strength going forward.”

Following the impact of these hurricane losses, UPC believes it will still have at least $2.2 billion of reinsurance remaining for future losses, out of its $2.8 billion limit 2017 program.

The maximum pre-tax retained loss on any future windstorm or earthquake event over the rest of the program period will be $25 million for UPC and $5 million for Blueline Re.

So United Insurance Holdings is set to rely heavily on the collateralized reinsurance and insurance-linked investments market for support in paying its hurricane Harvey and Irma claims.

Some of the largest ILS funds will participate in paying losses for major coastal insurers, such as UPC and the capital markets will in some cases pay more of the claims than traditional reinsurers, demonstrating the importance of ILS markets to the primary insurance market in catastrophe exposed regions.