Cat bonds possible for Federated National as reinsurance needs grow

As primary insurance group Federated National Holding Company (FNHC) finds it requires greater volumes of reinsurance capacity, to offset its growing book of premiums, the firm may consider the use of catastrophe bonds, according to the insurers CEO.

Federated National (FedNat) operates two primary insurers from its Florida base, Federated National Insurance Company, providing P&C insurance including multi-peril homeowners coverage in Florida, Alabama, Georgia, Louisiana, and Texas, and Monarch National, a recently formed Florida focused property insurer.

Federated National has been ramping up the volume of premiums it underwrites and with the majority of its underwriting featuring coastal and peak wind storm risks, its destined to become a significant buyer of property catastrophe reinsurance at renewals.

As its reinsurance program has grown, Federated National has introduced an increasing number of collateralized reinsurance or fronted insurance-linked securities (ILS) markets to help it diversify out its sources of risk capital.

But so far, Federated National has not become one of the Florida-based primary insurers to embrace the catastrophe bond as a source of reinsurance capacity, opting instead for ILS capacity via fronting or transformers.

However, this may not always be the case, according to President and CEO Michael Braun, who acknowledged recently that the “reinsurance market is very receptive” perhaps suggesting that brokers have yet to offer an attractive cat bond solution to the firm.

However, as reinsurance capacity needs grow at Federated National this could change, Braun explained; “We don’t have cat bonds, have no interest in cat bonds, but the bigger we get we may have to explore that.”

For the moment Braun said that he feels the capital is “more than adequate” in the reinsurance market, but noted that if the insurer continues to underwrite new business at the rate it has been recently it could require as much as $450 million of additional reinsurance capacity, with at least $250 million of that required from the market, with perhaps $200 million from the Florida Hurricane Catastrophe Fund.

At its 2015-16 reinsurance renewal Federated National purchased $1.82 billion of aggregate catastrophe reinsurance protection, from the Florida Hurricane Catastrophe Fund and the private market (including five collateralized or ILS markets) at a cost of just under $149.4 million.

So for 2016-17 Federated National could require as much as $2.27 billion of reinsurance cover, a sizable program which could well benefit from the addition of a catastrophe bond and the ability that would provide to tap into a more broadly diversified capital markets base.

In order to more fully diversify its providers of reinsurance capital a cat bond would allow Federated National to access a broad investor base, gain from an element of price discovery in its program and begin to build relationships with the full ILS investor base.