FHCF renews reinsurance at flat pricing, using more third-party capital

The Florida Hurricane Catastrophe Fund (FHCF) has renewed its reinsurance program at a slightly smaller size of $920 million, but with flat pricing and insurance-linked securities (ILS) players taking a slightly larger share in 2019.

Leading the ILS market participation in the FHCF’s 2019 reinsurance renewal was Fermat Capital Management, which participated in the program through fronting provided by reinsurer TransRe.

It’s worth noting that this is the first time TransRe has been seen to front business for an ILS fund manager, perhaps a sign that their could be more choice in the ILS market for fronting with another new entrant coming to the fore.

The FHCF explained that the $920 million reinsurance program was placed at “competitive and cost effective terms” with the attachment point for the coverage unchanged from 2018’s $10.5 billion.

The program has shrunk slightly though, having been $1 billion in size the previous two years.

But despite this shrinkage, the FHCF said that its program priced flat compared to the 2018 placement, on a risk-adjusted basis.

The flat pricing may explain some of the changes in the way the program has been shared out, with some upsizing and downsizing of reinsurers shares.

The total initial cost of the reinsurance coverage premium at the 2019 renewal was $63.5 million, just slightly higher than the prior years $63 million and back to the cost of 2016’s program.

But, the State Board of Administration (SBA) of Florida said that this premium cost of $63.5 million could drop once the final FHCF reimbursement premium is known later this year.

The net impact to FHCF Rates due to the cost of the reinsurance though is seen as $25.6 million, which is actually down on the prior years cost by $2.1 million.

The risk in the program has increased compared to last year, with reported insurance company exposure rising 3.7%, a hange in average coverage selection from 73.5% to 81.6% and also a statutory change in loss adjustment expense from 5% to 10%.

So those are the reasons the cost is very slightly higher, for slightly less coverage, but the renewal was still seen as flat by the FHCF, risk adjusted.

The reinsurance renewal was broadly supported by 37 global reinsurance firms, including ILS fund specialists as well as the traditional market.

The majority was rated, with just $50 million of the program being fully collateralized, with fronting and rated ILS manager owned vehicles helping the capital markets to participate to a significant degree.

Commenting on the placement, Ash Williams, Executive Director & Chief Investment Officer of the State Board of Administration, commented, “The SBA has optimized the FHCF’s capital structure and transferred nearly $1 billion of risk for the current contract year by successfully completing a reinsurance placement for the benefit of the FHCF and all Floridians. The FHCF starts the 2019 hurricane season in a strong financial position with $13.75 billion in total liquid resources available to pay claims up to its statutory limit of $17 billion.”

Advisory company to the FHCF Raymond James further explained, “By all indications, the pricing and terms of the FHCF’s 2019 reinsurance program placement at a risk-adjusted flat rate-on-line compared to its 2018 placement are very positive in light of the tightening risk transfer market conditions. By executing the 2019 reinsurance program, the FHCF was again able to transfer a part of the risk to global markets, expand its liquidity, diversify its claims-paying resources, and continue to strengthen its capital position, thereby decreasing the amount of any potential assessments on Florida citizens.”

Global reinsurer Swiss Re kept its line flat on the FHCF reinsurance renewal, at $185 million.

But RenaissanceRe shrank its share significantly, going from $262.5 million written in 2018, to just $175 million written in 2019.

RenRe’s shrinkage may be more to do with the FHCF’s desire for diversification within its reinsurance program than the reinsurer pulling back though.

RenRe also took $75 million through its DaVinci Re joint venture sidecar vehicle in 2019, down slightly from $82.5 million in 2018. In 2018 the reinsurer had also taken $30 million through its Lloyd’s syndicate 1458, but that did not participate in 2019, shrinking RenRe’s share even further.

Other notable increases or changes in the ILS sector included, Nephila taking $30 million through fronting by Allianz, up from $20 million in 2018.

Elementum taking $6 million of the program, the same as the prior year, but in 2019 through fronting by Hannover Re, to replace the now defunct TMR.

For the 2019 renewal, the LGT ILS team took $50 million through their rated Lumen Re reinsurance vehicle, down from $75 million in 2018.

But the biggest increase goes to Fermat Capital Management, which took its share of the program to $100 million in 2019, up from just $20 million in 2018.

As mentioned, Fermat accessed the program fronted by Transatlantic Re, the first time we’ve seen reinsurer TransRe offering a fronting for ILS service.

Given the increase in Fermat Capital’s line size, the ILS or third-party capitalised participation in the program has actually increased, from $198.5 million in 2018 to $261 million in 2019, including DaVinci Re.

As a percentage of the program, ILS or third-party capital backed capacity now contributes a greater share as a result, from just under 20% in 2018 to now roughly 28%.

There could also be other ILS participation hidden in lines from reinsurers like Validus Re, which could be writing some of the risk on behalf of AIG’s AlphaCat funds. As well as some risk that is likely to be ceded through reinsurers own third-party capital vehicles. Hence the percentage ultimately backed by ILS vehicles and collateralized reinsurance capacity is likely higher still.

The full list of reinsurance program participants and line sizes can be seen below:

United States:

‒ American Agricultural Ins (OH) – $1m
‒ American Standard Ins Co of WI – $15m
‒ Everest Re Co – $10m
‒ Munich Re America Inc – $10m
‒ Swiss Re America Corp – $185m
‒ Transatlantic Re – $5m
‒ Transatlantic Re (obo Fermat) -$100m

Europe:

‒ Allianz Risk Transfer AG (obo Nephila) – $30m
‒ Hannover Rueck (obo Elementum) – $6m
‒ Satec Srl/New Re – $1.5m

Bermuda:

‒ Arch Re Ltd – $60m
‒ Ariel Re Bda/Argo Re – $10m
‒ Chubb Tempest Re – $20m
‒ DaVinci Re Ltd – $75m
‒ Hannover Re (Bermuda) Ltd – $6m
‒ Hiscox Ins Co (BDA) Ltd – $10m
‒ Lumen Re Ltd – $50m
‒ Markel Bermuda – $5m
‒ Qatar Re Ltd – $5m
‒ Renaissance Re Ltd – $175m
‒ Validus Re Ltd – $50m
‒ XL Bermuda Ltd – $15m

United Kingdom:

‒ Lloyd’s Syndicate 0033 (HIS) – $5m
‒ Lloyd’s Syndicate 0609 (AUW) – $2m
‒ Lloyd’s Syndicate 0623 (AFB) – $0.9m
‒ Lloyd’s Syndicate 1183 (TAL) – $5m
‒ Lloyd’s Syndicate 1274 (AUL) – $2m
‒ Lloyd’s Syndicate 1414 (ASC) – $10m
‒ Lloyd’s Syndicate 1910 (ARE) – $10m
‒ Lloyd’s Syndicate 2014(ACA) – $5m
‒ Lloyd’s Syndicate 2623 (AFB) – $4.1m
‒ Lloyd’s Syndicate 2791 (MAP) – $5m
‒ Lloyd’s Syndicate 4020 (ARK) – $1m
‒ Liberty Mutual Paris/ Lloyd’s Synd 4472 – $6m

Asia:

‒ Korean Re Co – $12m
‒ New India Assurance Co. Ltd – $2.5m
‒ Taiping Re Co Ltd (HK) – $5m

TOTAL: $920 million