The largest insurance-linked securities (ILS) investment fund manager Nephila Capital participated in a new 20% quota-share reinsurance arrangement for Florida-focused United Insurance Holdings, as the company seeks to reduce its exposure to catastrophe loss events.
John Forney, President & CEO of UPC Insurance, explained, during the firms earnings call this week that the new quota-share arrangement, which it entered into in December, was backed by collateralised reinsurance and ILS specialists Nephila Capital as well as Cayman Islands hedge fund backed reinsurer Greenlight Re.
United this week reported a fourth-quarter 2016 loss and a much reduced profit for the full-year, after catastrophe events took the firm to an underwriting loss. The company called on reinsurance capacity to support its ability to pay losses, but now with this quota-share in place the impact to its own earnings will be greatly limited.
United entered into the quota-share in December, with Forney saying at the time that it was “the first time in our company’s history that we have done external quota share reinsurance and provides meaningful risk transfer for both catastrophe and attritional losses.”
The quota-share arrangement sees the reinsurance capacity providers taking 20% of risks (15% on single year and 5% over a two-year period) for all covered business, offering ground-up protection against losses from all major catastrophe perils and after a retention for attritional losses, where it sits alongside the insurers aggregate reinsurance protection.
Forney explained during this weeks earnings call that Nephila Capital and Greenlight Re are the two capacity providers behind the quota share deal, but he explained that since the deal came into effect the company has not seen a large enough attritional loss event (just $4 million so far in 2017) to cede through the quota-share, as it retains the first $30 million from each non-cat loss.
For hurricanes and major catastrophe losses the quota-share will see the capacity providers taking their 20% share from the ground-up.
Forney commented on the company’s outlook, with this additional reinsurance arrangement in place, saying; “Coupled with our first ever external quota-share, which we also put on the books in Q4, our company is in a strong capital position and ended the year with improved statutory capital and RBC ratios despite the cat losses we sustained.”
Forney says external, as the company used to cede a quota-share of business to an internally owned vehicle Promissum Re, which was part backed by third-party capital. It’s possible that this external quota-share replaces the vehicle, as it has not received a mention since 2015 now in the firm’s results.
CFO of Universal Brad Martz explained how the quota-share hit its earnings, saying; “The net expense ratio increased slightly more due to the impact of the $9.9 million of earned premium ceded under the company’s new 20% quota share reinsurance treaty which incepted December 1, 2016.”
Additionally, United expects to benefit from reinsurance cost savings as the American Coastal acquisition completes.
Forney said; “There are very compelling reinsurance cost synergies with regard to combining our reinsurance programs and we do expect to have a combined program this year and that’s where you’ll see the real savings.”
That will enlarge the reinsurance program as well and provide additional opportunities to providers like Nephila and Greenlight to increase their participation in United’s program.