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Heritage sees “significantly improved” reinsurance costs at renewal


Heritage Insurance Holdings has revealed an 8% saving at its June 1st 2017 reinsurance renewal, while at the same time the insurer achieved enhanced terms and reduced its retentions, all with the help of the capital markets as catastrophe bonds and collateralized reinsurance play a role.

Heritage said that the 2017-2018 reinsurance program has been incorporated in a single reinsurance structure, with participation from traditional reinsurance companies, collateralized reinsurance providers, catastrophe bond investors, through the Citrus Re cat bond program, and a 45% participation Florida Hurricane Catastrophe Fund (FHCF) layer.

After the renewal Heritage and its subsidiaries, Heritage Property & Casualty Insurance Company and Zephyr Insurance Company, now benefit from first event reinsurance protection for catastrophe losses of up to $1.75 billion in Florida and up to $731 million in Hawaii, as well as multiple event protection up to $2.62 billion, exceeding rating agency and regulatory requirements.

Bruce Lucas, Chairman and CEO of Heritage, commented on the renewal and explained some of the enhancements achieved; “Our 2017 reinsurance treaty is a significant improvement over the 2016 treaty. We have reduced catastrophe reinsurance costs by over $20 million, or 8.3%, while improving treaty terms and conditions. Notably, our first event retention was reduced from $40 million to $20 million and our ground up retention for second event coverage is $16 million.

“We continue to minimize our reliance on state government sponsored reinsurance and maintained our participation in the FHCF at 45%. Our new program was placed on a cascading basis which provides greater horizontal protection in a multiple small events scenario and features additional coverage enhancements. In addition, Heritage expanded its use of multi-year, fully collateralized catastrophe bonds and has $687.5 million in catastrophe bond coverage today.”

The enhancements show that the June reinsurance renewal have seen some improved terms available to certain insurers. In the case of Heritage, which has grown steadily and developed strong partnerships with reinsurers and ILS fund managers, the enhanced terms as well as attractive pricing reflect the fact that the insurers program was in-demand.

Heritage bulked up on its catastrophe bond coverage during the first-half of 2017, with a $125 million Citrus Re Ltd. (Series 2017-1) in March and a $25 million Citrus Re Ltd. (Series 2017-2) transaction in May, boosting the insurers overall cat bond coverage.

Heritage said that the estimated net cost for its 2017-2018 catastrophe reinsurance program was around $223 million. Heritage also estimates that per risk and facultative reinsurance coverage will cost an additional $7 million.

To give you an idea of how rapidly Heritage has grown and its need for reinsurance increased, at the June 2014/15 renewal Heritage had just $990 million of reinsurance coverage, including $200m of 2014 cat bonds from Citrus Re. That increased for the 2015/16 season when 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.

For the 2016/17 reinsurance renewal Heritage increased its reinsurance coverage, with total protection rising by 70% to $3 billion of coverage, almost 25% of which was provided by the Citrus Re cat bond program.

Now for the 2017/18 renewal Heritage has actually shrunk the program slightly from last year, when it had first event protection up to $1.9 billion of losses in Florida, first event coverage up to $1.1 billion in Hawaii, and multiple event coverage of up to $3 billion.

But with the benefits provided by lowering of retention levels Heritage’s reinsurance coverage may be more efficient for its needs in 2017/18 anyway.

The net cost is a significant reduction from the roughly $240 million spent on reinsurance last year.

Heritage said that the drop in price is largely down to proactive exposure management and “significantly improved” market pricing.

Heritage is a good example of a ceding company that has managed to improve on both price and terms at its reinsurance renewal, something that the brokers have said was largely reserved for counterparties that were deemed most attractive to work with.

That’s a positive reflection of Heritage’s strategy and the way the company works to proactively control its losses, something that reinsurance and ILS players will value greatly when looking at long-term counterparties to work with.

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