Federated National finalises cascading, multi-year reinsurance purchase

Primary insurer Federated National Holding Company (FNHC) has announced the completion of its 2016-2017 catastrophe reinsurance program, securing multi-year protection structured to incorporate a cascading feature, and the termination of its 30% quota share arrangement.

The Florida domiciled insurer operates two insurance companies, Federated National Insurance Company and Monarch National, which have both agreed to the terms of Federated National’s (FedNat) excess of loss catastrophe reinsurance treaties for 2016.

For a portion of Federated National Insurance Company’s 2016 reinsurance program the firm secured multi-year protection, with a section of the coverage set to expire in June 2017, while another portion of the protection will stay in-force until the end of June 2018.

“Given current reinsurance market conditions, we believe it was the appropriate time to secure multiple year capacity at favourable pricing and terms and conditions,” said the firm.

Interestingly, the private market treaties that comprise Federated National’s excess of loss treaties are structured into protection layers, that incorporates a cascading feature, where all layers attach after $18.45 million losses for the firm’s Florida exposure.

“If the aggregate limit of the preceding layer is exhausted, the next layer drops down (cascades) in its place. Additionally, any unused layer protection drops down for subsequent events until exhausted,” explains the firm.

Federated National states that these treaties are all with rated reinsurers that have obtained at least an A- rating from either Standard & Poor’s (S&P) or A.M. Best, or, have “fully collateralized their maximum potential obligations in dedicated trusts.”

Pressures on the global reinsurance marketplace continue to support buyers of protection, with many cedents securing more sizeable reinsurance programs at recent renewals, at an attractive price and with favourable terms and conditions.

Furthermore, although unclear how much of its 2016 program utilises collateralized reinsurance, which is most likely backed by the insurance-linked securities (ILS) market, ILS capacity is increasingly finding itself on primary insurers’ renewals programs. Last year FedNat increased its use of ILS and collateralized markets, so it’s safe to assume they played a key role again at this years renewal.

As the market continues to evolve and ceding insurers have a greater acceptance and understanding of the collateralized and ILS market, it’s likely capital markets capacity will feature more and more heavily at primary renewals.

Along with securing multi-year protection Federated National also announced the termination of its 30% quota share treaty. The non-renewal will see the firm retain 30% more of its gross written premium, and will be terminated on a cut-off basis.

The firm still has a 10% quota share agreement in place, which has entered its second and final year, providing cover for an in-force new and renewal basis for its Florida homeowners’ insurance program.

For 2016-2017, via a combination of private reinsurance and its 75% Florida Hurricane Catastrophe Fund (FHCF) participation, which it maintained for the second year, Federated National secured $2.22 billion of aggregate reinsurance protection, which has a maximum single event coverage totalling $1.58 billion.

The $2.2 billion aggregate reinsurance program purchased by Federated National cost roughly $175.9 million, of which $53.8 million is payable to the FHCF. The firm has increased the size of its reinsurance program in recent years, growing from $1.49 billion at a cost of $117 million in 2014, to $1.82 billion at a cost of just below $149.4 million last year, up to the $2.2 billion of protection secured this year.

So clearly the firm is optimising how it buys its reinsurance protection and adjusting its retention desires, dropping one of its two a quota share agreements at the same time as obtaining multi-year protection, all of which is supported by the cheaper, more efficient cost of reinsurance capital globally as a result of the competitive landscape.

The 2016 program also includes $2.8 million for private reinsurance for Federated National’s non-Florida reinsurance, which affords the firm additional coverage “down to a $8 million retention for each of two covered events,” explains the firm.

Additionally, Federated National subsidiary Monarch National, which was formed in 2015 as a Florida focused property insurer, secured $28.55 million of aggregate reinsurance protection, again structured to include a cascading feature, and which cost roughly $1.415 million, which includes $0.562 million payable to the FHCF.