Heritage near doubles reinsurance & cat bonds at reduced cost in 2015

Heritage Insurance Holdings, Inc., the parent to Heritage Property & Casualty Insurance, has had another stunning result at its reinsurance renewal, providing a glimpse into just how much primary property focused insurers are saving on their risk transfer right now.

Heritage is a buyer of traditional and collateralized reinsurance, as well as catastrophe bonds, for its peak property catastrophe exposures. As an insurer that has been active in the Florida Citizens depopulation, it has assumed a wealth of business that is exposed to the largest hurricanes that the Atlantic can throw at the U.S. coastline.

As a result, buying adequate reinsurance is key to an insurer like Heritage, and in the currently depressed pricing environment, thanks to ample capacity and competition from both traditional and alternative or insurance-linked securities (ILS) players, buying reinsurance is a lot cheaper than it was even a year ago.

In 2015 Heritage has more than doubled its catastrophe bond sourced reinsurance protection, with the issuance of the $277.5m Citrus Re Ltd. (Series 2015-1). That is on top of the still in-force $200m from 2014’s Citrus Re Ltd. (Series 2014-1) and Citrus Re Ltd. (Series 2014-2).

However, it’s the overall program that has increased so much in 2015. In its Q2 results last night, Heritage revealed that for 2015 it now has total reinsurance coverage for $1.77 billion of losses and loss adjustment expenses, including the $477.5 million from its catastrophe bonds.

In 2014, Heritage only had $990 million of reinsurance coverage, including the $200m of 2014 cat bonds.

On top of this, in 2015 Heritage has bought reinstatement premium protection for an additional $440 million of coverage, compared to just $200 million of reinstatement coverage in 2014.

So, overall the $1.77 billion of coverage is a 45% increase from the 2014 figure. At the same time the reinstatement protection has more than doubled. Also Heritage has more than doubled its cat bond protection.

So you’d expect some sort of price increase? Even in this low reinsurance pricing environment?

Wrong! Heritage says; “The pricing of the new program, on a risk adjusted basis, was modestly lower than last year’s program.”

That suggests rate increases of 45% across the program or more, with some types of coverage likely down significant more than that. A real demonstration of the value that reinsurance buyers can get from the market right now.

This begs the question whether those insurers that have been retaining more risk and consolidating reinsurance buying have been doing the right thing? Have they been missing out on an opportunity to upsize their protection significantly in recent months?

Heritage is an expansive insurance player, growing rapidly and expanding into new regions as well. Hence it’s no surprise that it needs more reinsurance protection to cover a rapidly expanding book.

The insurer explained; “The increase in the amount of coverage is due to our significant increase in premiums in force and total insured value, including the addition of commercial residential policies, which were not part of the 2014-2015 program.”

But being able to increase reinsurance protection so much for no increase at all in price, in fact a slight decrease, is amazing and really brings home the impact of price declines and explains why some smaller reinsurance firms are finding times increasingly tough.

It also perhaps explains why ILS players have been pulling back in Florida and seeking to encourage a floor on pricing there, and in other peak property catastrophe zones. There comes a point where even efficient or lower-cost capital cannot continue to underwrite at these increasingly reduced prices.

Maybe we’ve reached that point now. For Heritage, it’s good news that they’ve secured this reinsurance now, much of which we’re sure will be on a multi-year basis as prices may not be so low for much longer, especially if Florida sees a storm over the rest of the tropical season.