During the third-quarter of 2021 primary carrier FedNat reported a reduction in its net catastrophe losses as its robust reinsurance arrangements really came into their own, with the insurer ceding some $562 million of gross catastrophe losses to its reinsurance partners.
Ronald Jordan, FedNat’s CFO, said that aggregate gross losses from catastrophe events, which were largely driven by hurricane Ida, amounted to $599 million for Q3.
On top of hurricane Ida, FedNat also experienced losses from three other tropical cyclones, Elsa, Fred and Nicholas, as well as other smaller cat events.
Hurricane Ida was a particularly significant event, driving $575 million of the quarters gross catastrophe loss burden.
But speaking during FedNat’s earnings call yesterday, CFO Jordan said that the reinsurance arrangements handled the majority.
“These gross losses were reduced by ceded losses of approximately $562 million, consisting of $558 million under our excess-of-loss reinsurance treaties and $4 million under quota share treaties,” Jordan explained.
Which left the carrier with $37 million of retained catastrophe losses within its insurance subsidiaries.
The significant losses suffered will almost undoubtedly have flowed, to some degree, into the ILS market, with some ILS funds and collateralized sources of reinsurance capacity taking their share.
The significant catastrophe losses also drive home some of the reasoning behind FedNat’s announced shift back to a focus on its home state of Florida and away from the coastal states of Louisiana and Texas, where it had expanded in recent years.
Jordan explained that, “Our non-Florida business has contributed almost 70% of our net catastrophe losses, before fee offsets, despite representing less than 40% of our in-force premium.”
This shift, plus the approved rate increases FedNat has been able to secure in Florida, mean that the company expects to achieve ex-cat earnings improvements in 2022.
While reductions in the size of its book and the total insured values it covers, mean that FedNat has been able to “reduce our total catastrophe reinsurance costs for the ’21 and ’22 treaty year,” Jordan said.
Michael H. Braun, FedNat’s Chief Executive Officer gave some further clarity into the reasoning behind the shift back to a Florida homeowners focus.
“I think the Florida market is changing,” he explained. “I think the rates are more accurate. I think AOB reform has taken a small bite of the apple, I think SB76, has taken a small bite of the apple. But the truth is, rates have really changed materially to reflect these increased costs. So I just want to stress that.”
He also said that, “I think that shrinking the non Florida book, the SageSure book, and they’ve been a very good partner but once again, the weather has been very unkind of that book and also with Maison, the weather has been very unkind. We have to respond.
“So those two books of business represent approximately $270 million of premium. And that would reduce us down to the $450 million, much more appropriate for our capital base.”
So FedNat’s executive team clearly feel they are right-sizing the business into a market where rate is getting closer to covering loss costs.
Of course, Florida has escaped major hurricane impacts in the last season, so we may now have to wait until the next peak hurricane season to assess how successful the shift will be.
But one thing is certain, FedNat is going to continue to rely heavily on reinsurance capital, to enable its own capital-base to absorb and weather the kind of loss events the company has experienced in recent years.
After ceding such a significant amount of losses to those reinsurance partners in 2021, it’s likely the company will also be looking at rising reinsurance costs as well, although only commensurate with its new exposure footprint and its focus in the home state of Florida.