Heritage Insurance Holdings, Inc., parent to Heritage Property & Casualty Insurance and Zephyr Insurance, has increased its reinsurance protection, from both traditional and capital market sources, by 70% to $3 billion in 2016, with $727.5m from its Citrus Re catastrophe bond program.
Heritage, a buyer of traditional and fully collateralized reinsurance, as well as catastrophe bonds, for its peak property catastrophe exposures, has been growing expansively both in its home state of Florida and now expanding into North Carolina, with approval already for South Carolina, Alabama, Mississippi and Georgia. Additionally Heritage writes property insurance in Hawaii through its Zephyr subsidiary.
Heritage also grew rapidly within Florida thanks to the Citizens depopulation program, which the insurer participated in numerous times since 2012 in order to grow its own portfolio.
The expansive nature of Heritage, as well as the property catastrophe exposure of its underwriting book, means reinsurance is key for the firm and at the recent June 1st reinsurance renewal Heritage upsized its protection in a big way.
A year ago, for the 2015/16 season, Heritage secured total reinsurance coverage for $1.77 billion of losses and loss adjustment expenses, including $477.5 million from its in-force at the time Citrus Re catastrophe bonds.
A year prior to that, at the 2014 renewal, Heritage had just $990 million of reinsurance coverage, including $200m of 2014 cat bonds from Citrus Re.
For the 2016/17 renewal Heritage has greatly increased its reinsurance coverage, with total protection rising by 70% to $3 billion of coverage, almost 25% of which is provided by the Citrus Re cat bond program.
Heritage explained that the $3 billion of cover protects both its insurance subsidiaries, Heritage Property & Casualty Insurance Company and Zephyr Insurance Company, and the program is incorporated into a single reinsurance structure.
Coverage is provided by traditional reinsurers (some of which are likely fully collateralized by ILS funds or fronting for ILS funds), the in-force catastrophe bonds issued by Citrus Re and protection from the Florida Hurricane Catastrophe Fund (FHCF).
With around $3.0 billion of reinsurance protection for catastrophic losses now in place for 2016 and 2017, Heritage says that this “exceeds the requirements established by the Company’s rating agency, Demotech, Inc., the Florida Office of Insurance Regulation and the Hawaii Insurance Department.”
Bruce Lucas, Chairman and CEO of Heritage, commented; “We are pleased to have secured $3.0 billion in reinsurance coverage. This level of catastrophe reinsurance reflects the Company’s conservative approach to risk management and our focus on protecting both our policyholders and our stockholders against the peril of a hurricane.
“Our mix of business has changed from last year with the addition of the wind-only book of business from Zephyr, the wind-only policies assumed from Citizens and the growth we have experienced in our commercial residential business, all of which have higher reinsurance costs and lower attritional loss ratios. The addition of the Zephyr policies allowed us to recognize significant synergies, while further diversifying our reinsurer panel by adding several new reinsurers to our program. We are pleased with our rate, the significant level of coverage we have from our partners and the positive shift in business toward lower attritional losses.”
Heritage’s 2016/17 reinsurance program features first event protection up to $1.9 billion of losses in Florida, first event coverage up to $1.1 billion in Hawaii, and also multiple event coverage of up to $3 billion.
Heritage P&C retains of $20m of the first event and Osprey Re, Heritage’s captive reinsurance company, retains an additional $20m on a first event basis. Additionally, Heritage P&C has a $15m second event primary retention and a $5m primary retention for third and subsequent events.
But if the first event occurs in Hawaii, Zephyr and Osprey Re both have a $15m and a $20m primary retention, respectively. Zephyr has a $5m primary retention for any second or subsequent events to cause the insurer losses.
Heritage estimates the total cost of its 2016/17 catastrophe reinsurance program at around $240m, which it says represents an estimated 37% cost of reinsurance or ceded premium ratio.
Interestingly, the cost as a percentage of gross premiums earned has increased this year by around 2.6%, Heritage said, but the insurer puts this down to a change in business mix with the inclusion of wind only policies as well as an increased number of commercial residential policies that have lower non-wind (all other peril) losses.
Heritage also renewed property per risk reinsurance treaty at a rate decreased for 2016/17, which limits the insurers losses to $1m.
The increased demand from insurers like Heritage, which are growing rapidly, will have more than offset the decline in reinsurance purchased by Citizens as it depopulated. That will have helped to soak up some of the demand and capacity targeting Florida and other peak U.S. property catastrophe markets, with ILS participation likely a key piece of the reinsurance program both in the cat bonds and collateralized reinsurance forms.
Heritage’s $727.5m of outstanding catastrophe bonds, through four transactions, include the most recent $250m Citrus Re Ltd. (Series 2016-1) the $277.5m Citrus Re Ltd. (Series 2015-1), the $50m Citrus Re Ltd. (Series 2014-2) and the $150m Citrus Re Ltd. (Series 2014-1).