United suffers loss on catastrophes, reinsurance & ILS to take share

Florida’s United Insurance Holdings has reported a loss for the fourth-quarter of 2016 and a much reduced profit for the full-year after catastrophe losses took the firm to an underwriting loss, but its reinsurance providers, including ILS fund managers, who will take a significant share.

United Insurance Holdings uses a significant amount of collateralised reinsurance from the insurance-linked securities (ILS) market, with catastrophe bond investors and ILS funds all exposed to the insurers loss experience.

United has reported a combined ratio of 122.7% for Q4 2016, with an 81.5% loss ratio helping it to a net loss of over $10.5 million for the quarter.

Current year catastrophe losses added 26.4% to the combined ratio in the quarter, while prior year development added another 6.1%.

For the full year the combined ratio came out at a technically unprofitable 104.9%, although the company did report a slight net profit and return on equity for the full-year 2016.

John Forney, President & CEO of UPC Insurance, explained; “Catastrophe losses from Hurricane Matthew and many other smaller events, coupled with a very difficult noncat loss environment in Florida, hurt our bottom line results for Q4 and the full year”

United’s robust reinsurance program is set to pay for a significant share of its loss experience in 2016, with ILS funds and other collateralised reinsurance investors unlikely to avoid paying a share of the total.

Losses and loss adjustment expenses reached $98.7 million for the fourth quarter of 2016, but the company reports that retained catastrophe losses only amounted to $32.0 million, from losses due to Hurricane Matthew and other events not covered by United’s reinsurance programs.

For the full-year 2016 United reports losses and loss adjustment expenses of $298.4 million, with just $55.8 million of catastrophe losses retained during 2016, from winter and spring storms in Florida and Texas, the August Louisiana storms, Hurricane Hermine, Tropical Storm Colin, Hurricane Matthew, and other events not covered by its reinsurance programs.

Interestingly, the prior year reserve development in Q4 2016 was due to non-catastrophe water claims in Florida for accident year 2015, so the assignment of benefits issues the State has been suffering.

With a large proportion of losses passed on to its reinsurance programs, which include for 2016 $1.52 billion of coverage, with a $30 million first event and $10 million second event retention. The program provides for $1.52 billion of aggregate coverage and $1.42 billion of per-occurrence. An FHCF replacement layer is fully collateralised within the program, so largely from ILS players we assume.

Collateralised reinsurance players are scattered across the United reinsurance program, with such ILS fund specialists as Nephila Capital, Elementum, Aeolus, Secquaero and others all featuring in some manner.

Of course United also has the Laetere Re Ltd. (Series 2016-1) catastrophe bond transaction, however based on recent price indications it looks like this cat bond has not been affected by any of the insurers 2016 loss experience.

Additionally, United launched a collateralised reinsurance sidecar like vehicle back in 2015, Promissum Re, however we cannot confirm whether that vehicle remained in use after mid-year 2016. If it did though, it is safe to assume it likely operates a quota-share with the insurer so may also have taken a share of its losses.

Supporting insurers like United when they face difficult catastrophe loss years like 2016 is exactly what the ILS market is good at. The ILS market and its fund managers pay regular claims towards primary insurers losses, helping them to retain less of the burden and leverage the capital markets as a source of reinsurance.

It looks like United will be benefiting from this and such experience is only likely to strengthen its appreciation for ILS capacity and the capital markets as a source of reinsurance.