Collateralized & ILS markets up in Federated National’s reinsurance

Federated National Holding Company (FNHC) has increased its use of collateralized reinsurance and insurance-linked securities (ILS) fund capacity at its 2015 reinsurance renewal, in another example of the continued penetration of ILS capital.

Federated National (FedNat) operates two insurance companies from its Florida base, Federated National Insurance Company which provides P&C insurance including multi-peril homeowners coverage in Florida, Alabama, Georgia, Louisiana, and Texas, and Monarch National which is a newly formed Florida property insurer.

As a result much of its underwriting is focused on coastal and peak storm exposed regions, making it a buyer of property catastrophe reinsurance capacity and one of the carriers that the ILS and collateralized markets are increasingly supporting through provision of reinsurance.

At its 2014 renewal, Federated National added a number of ILS and collateralized markets, with those listed for the 2014 to 2015 reinsurance year being two vehicles operated by London headquartered ILS manager Securis Investment Partners LLP (Securis Re III Limited Bermuda and Securis Re IV Limited Bermuda), as well as Bermuda ILS manager Pillar Capital Management who was fronted by Hannover Re.

At the mid-year 2015 reinsurance renewals the number of ILS and collateralized reinsurance markets participating in the FedNat program has grown considerably. The 2015 to 2016 reinsurance program features:

• Nephila Capital (fronted by Allianz Risk Transfer)
• LGT ILS Partners (through its own reinsurance vehicle Collateralised Re Ltd.)
• Coriolis Capital Limited (fronted by Horseshoe Re)
• Securis Investment Partners with three reinsurance vehicles (Securis Re II Ltd. Bermuda, Securis Re IV Ltd. Bermuda and Securis Re V Ltd. Bermuda)
• Pillar Capital Management (again fronted by Hannover Re)

So three new ILS counterparties were added for the 2015 renewal, which will no doubt have increased the amount of fully-collateralized reinsurance protection and fronted ILS protection that Federated National benefits from.

One other participant in the reinsurance program, RenaissanceRe’s DaVinci Re sidecar-type vehicle, will also have helped to expand the third-party capital participation in Federated National’s renewal.

For the 2015-16 reinsurance renewal Federated National purchased $1.82 billion of aggregate catastrophe protection, from the Florida Hurricane Catastrophe Fund and the private market at a cost of just under $149.4m.

In the prior year the insurer had $1.49 billion of reinsurance cover, at a cost of $117m, so pricing has not fluctuated very much from year to year. It’s important to note that in 2015 the FHCF percentage cover has dropped from over 37% of Federated National’s Florida exposure down to 33%, which has cost implications.

The participants in the 2015 reinsurance program who provided unrated and fully-collateralized reinsurance (so LGT, Coriolis, Securis and Pillar) are all participants in a reinstatement premium protection program for FedNat, according to the companies filings.

FedNat also has two quota share reinsurance agreements in place, a 30% which is entering its second year and a 10% quota share arrangement that began on July 1st 2015 and runs for two years. These help the insurer to offload a fixed percentage of its losses up to certain limits.

The increasing participation of ILS and collateralized reinsurance markets in primary property insurers reinsurance program renewals signifies the growing acceptance of the collateralized product and the increasingly strong relationships that ILS markets are building with cedents.

At each future renewal we can expect to see the collateralized and ILS market participation increase, as ceding insurers add more ILS markets to their roster of reinsurers. Over time this will help these markets and ILS fund managers to increase their assets under management, as they become a regular fixture on these renewal panels.