FedNat gains reinsurance synergies from expansion & diversification

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U.S. primary insurance group FedNat Holding Company is benefiting from its increasing scale and diversification outside of Florida, as the firm gained catastrophe reinsurance synergies at its July 1st renewal when buying a $1.84 billion program this year.

FedNat logoFedNat had been very Florida focused, given its headquarters are located there, but noted that in buying its renewal for 2019 the concentration in Florida has now reduced, as 18.3% of the its exposure is now non-Florida, up from 13.4% last year. This figure will rise even higher to 34.7% after the firms pending acquisition of Maison insurance.

FedNat has cleverly secured its 2019-2020 reinsurance program to cover wholly owned subsidiaries FedNat Insurance Company and Monarch National Insurance Company, as well as the soon to be owned Maison Insurance Company.

That acquisition is still pending approvals, but clearly FedNat is confident it will go ahead, as the firm bundled it into its reinsurance renewal this year to benefit from the synergies and economies of scale it offers.

Maison, FedNat and seller PIH (1347 Property Insurance Holdings, Inc.) have agreed to combine FNIC, Monarch, and Maison under a single reinsurance program for this year.

The hope is that the acquisition will close relatively soon and the fact the reinsurance program already covers the new insurer acquisition will make that transition even smoother it seems.

FedNat’s renewal involved a purchase of $1.84 billion of aggregate reinsurance limit, up from $1.79 billion a year earlier.

The aggregate private market reinsurance limit purchased rose by $147 million as the company needed slightly less Florida Hurricane Catastrophe Fund (FHCF) protection, due to its diversification and slightly smaller Florida book of insurance business.

The reinsurance program provides FedNat and subsidiaries with maximum single event coverage of roughly approximately $1.28 billion.

All of the program’s reinsurance layers have been structured to provide cascading coverage and include prepaid automatic premium reinstatement protection, the insurer said.

The projected treaty year ceded premium to gross written premium ratio increased by 230 basis points from 28.2% (including Maison for comparison purposes) to 30.5%, representing an 8.1% year-over-year increase, FedNat further explained.

While spend for the program was $162.2 million for the private market reinsurance coverage and $42.5 million for the FHCF contribution, for a total program spend of $204.7 million. This compares to $153 million spent in the prior year, although that did not include coverage for Maison of course.

FedNat Insurance Company (FNIC) and Monarch kept their FHCF participation at 75% for the 2019 wind season and obtained similar private market protection for an additional 15%, the insurer explained, while its soon to be acquired Maison subsidiary purchased FHCF protection for 90% for the same period.

FNIC kept its $20 million retention and Maison kept its retention at $5 million, but Monarch reduced its retention from $3 million to $2 million. Non-Florida first event retention rose from $15 million to $20 million for FNIC, while its second event retention stayed at $2 million for hurricane-only events.

In addition, FNIC also renewed its quota share reinsurance treaty through June 30th 2020, which excludes coverage for losses from named storms, at similar terms to those in effect for the last treaty year.

Collateralized reinsurance markets and ILS funds were again key participants in FedNat’s renewal, we’re told, although precise line sizes are not available. We’re told the majority of the collateralized limit purchased was via a fronting vehicle or rated entity of an ILS fund manager.

Michael H. Braun, Chief Executive Officer of FedNat, commented on the successful placement, “We continued to see strong support from our reinsurance partners throughout this year’s renewal process. We appreciate the ongoing commitment from our long-term partners amidst an evolving view of their risk profile, and we welcome several new partners into this year’s program.

“We have made significant progress over the past years to reduce our exposure to the Florida market and broadened our diversification in other coastal states throughout the Southeast, both organically and via our pending acquisition of Maison. Maison’s homeowners line of business in Texas was recently approved for a 30.5% rate increase and we continue to prepare our integration efforts to incorporate Maison into FedNat’s operations at the appropriate time, subject to continued regulatory review. Looking ahead, we believe that our enhanced reinsurance programs, the addition of Maison and the expected benefits of Assignment of Benefits reform in the Florida market will benefit our overall portfolio and strengthen our earnings profile.”

FedNat noted that with Maison included in a combined reinsurance tower it is still is purchasing slightly less first event limit, but around $147 million more aggregate reinsurance limit from the private market, due to the its decreasing Florida exposure and less FHCF protection.

Going forwards, once Maison is fully embedded in the company, FedNat said that its, “Louisiana and Texas exposure will increase further, resulting in a greater spread of risk outside of Florida, which benefits the Company in its overall reinsurance purchase.”

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