Heritage hails reinsurance cost savings, but 90% FHCF likely the driver

Heritage Insurance Holdings, Inc., the Florida headquartered, nationally expanding U.S. property casualty insurer, has completed its reinsurance renewal and hails a saving made, however any reduction in cost is likely been achieved by increasing its FHCF participation to the 90% level.

Heritage said it has completed its catastrophe reinsurance program placement for the 2019-2020 wind season and year, covering the firms statutory insurance subsidiaries that include Heritage Property Casualty Insurance Company (HPCIC), Narragansett Bay Insurance Company (NBIC) and Zephyr Insurance Company (ZIC).

At this reinsurance renewal, Heritage said it has successfully raised the return period of its reinsurance program to the highest level it has ever achieved, expanding its first event reinsurance coverage to $1.5 billion in the process.

At the same time the company has hailed the reduction in overall costs of the reinsurance program placement, as the firm says it has saved $10 million versus the prior year program.

The 2019-20 reinsurance program has cost Heritage $249.2 million, equivalent to 26.8% of first quarter 2019 premiums-in-force, which is down from the $259.5 million or 28.1% of first quarter 2018 premiums-in-force that it paid in 2018.

However, it’s important to note that comparing Heritage’s 2019 catastrophe reinsurance program and its 2018 program is not comparing like for like, as the company dramatically expanded its participation level in the Florida Hurricane Catastrophe Program (FHCF) this year.

Heritage increased the level of its FHCF participation from the 45% minimum up to the 90% maximum for the 2019 wind season, citing an ambition to reduce its reinsurance pricing as the driver for this, as our sister publication Reinsurance News had previously reported.

After the losses suffered from hurricane Irma, then the ongoing loss creep and increases to the insurer’s ultimate loss from that event, plus losses from hurricane Michael as well, Heritage knew that rate rises were on the way and has leveraged the FHCF as a source of cost-efficient reinsurance protection to minimise the impact of a firmer Florida reinsurance renewal market on the company.

Something that has clearly, worked, as Heritage is better protected by reinsurance, with a higher first event limit, and all at a saving compared to the prior year even though the Florida market has definitely hardened at June 1st.

That’s quite an achievement and something that should please the insurers investors at this time. But it is almost certainly not better reinsurance pricing that will have driven these savings, rather it is likely the FHCF covering a larger share of the insurer’s tower.

The FHCF coverage used to provide $546 million of the Florida first event reinsurance tower for Heritage, being 45% of a $1.2 billion layer.

Details aren’t currently available on the size of the layer the FHCF is covering this year, but having doubled to a 90% participation, it is likely that Heritage has actually purchased a little less open market reinsurance in 2019.

Another factor that will also have driven some reinsurance cost efficiencies will be the growing diversification within Heritage’s book, as it expands into new states and its subsidiary operations outside Florida increase in scale.

This makes its reinsurance program a less concentrated bet, which no doubt delivers some cost savings on a per unit of risk basis transferred as well.

Bruce Lucas, Heritage’s Chairman and CEO, commented, “Over the past four years we have led the market on diversifying away from Florida and the Tri-County. Our differentiated business plan is creating very favorable results for our shareholders as evidenced by lower attritional loss trends and better reinsurance terms and pricing. Despite a hard market, we were able to significantly increase our reinsurance program to the highest point in the Company’s history at a cost savings of $10 million. I would like to thank all of our reinsurance partners for their strong support.”

Update: A contact also alerted us to the fact that some of the cost savings may have occurred due to Heritage’s acquisition of Narragansett Bay Insurance Company, as the pair both had multi-year reinsurance arrangements in place which had expired and so could be renegotiated on a combined basis this year. This may also have been a driver of further reinsurance cost efficiencies for Heritage.

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