Palomar extends reinsurance tower to $1.4bn despite “hard” renewal

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Palomar Insurance Holdings, the speciality California-based insurer that provides largely catastrophe exposed property covers, has renewed its reinsurance program to provide it with coverage up to $1.4 billion, despite market conditions it explains as “hard”.

palomar-specialty-insurance-logoFor the second year running, Palomar has added additional coverage to the top of its reinsurance tower, as it continues to expand the protection it has in-line with the growth of its underwriting business.

This year Palomar elected to place the full reinsurance tower in the traditional market, albeit with some backing from collateralised players, likely including some of the largest insurance-linked securities (ILS) funds).

As we explained recently, Palomar has elected not to renew its Torrey Pines Re catastrophe bond transaction this year, in reaction to the way pricing and terms were firming in the insurance-linked securities (ILS) market.

However, it still encountered “hard” market conditions in reinsurance as well, but given the increase to its program the company clearly feels its focus on the traditional product was well-founded this year.

A year ago, Palomar’s reinsurance program coverage reached up to $1.05 billion for earthquake events.

But at this mid-year 2020 reinsurance renewal, Palomar has now extended the tower up to $1.4 billion for earthquake loss events and $600 million for hurricane events.

Palomar said that this provides “adequate headroom” to support its growth initiatives and covers it well in excess of its 1:250 year zone peak zone Probable Maximum Loss (PML).

At the renewal, Palomar secured roughly $200 million of incremental reinsurance limit to cover California earthquakes, around $300 million of incremental limit for all its earthquake zones and around $80 million of incremental windstorm limit to cover hurricane exposures.

At the same time, Palomar opted to increase its catastrophe event retention from $5 million to $10 million across all covered perils under the reinsurance program, also retaining $3 million as a vertical co-participation in certain layers of the program.

Palomar says that these layers are ones that “the Company believes to present a compelling risk adjusted return,” but at this renewals co-participations are also being used as a negotiating lever by reinsurance markets, so it’s likely a factor that has helped the insurer control its reinsurance renewal pricing.

“We are very pleased to successfully complete our 6/1 placement,” Mac Armstrong, Palomar’s Chief Executive Officer and Founder commented. “We were able to procure an incremental $200 million of limit to buttress our growth with the requisite reinsurance capital, adjust our retention modestly to reflect our growing and strong balance sheet while keeping our retention inside of one quarter of earnings and less than 5% of surplus, and maintain our strategy of minimizing attritional loss and generating fee income from our Specialty Homeowners business.”

Commenting on the state of the reinsurance renewal market at mid-year 2020, Armstrong acknowledged that rates are hardening.

“This placement marks the first true hard market Palomar has faced since its formation, and we are pleased to have come through with the requisite capacity to sustain our growth and margin profile,” he explained.

Adding that, “While the costs are higher, they are digestible. The rising cost of reinsurance associated with this placement should create several opportunities within our commercial lines portfolio.”

At the renewal, Palomar added 18 new reinsurers to its reinsurance panel, taking it to roughly 90 strong.

All of the reinsurers supporting Palomar have either an “A-” (Excellent) (Outlook Stable) or better financial strength rating from A.M. Best or post collateral to support their obligations.

The insurer secured prepaid reinstatements for all layers of its reinsurance program that include a reinstatement provision.

Palomar also completed a Specialty Homeowners Facility at this renewal, offering the company quota share reinsurance for its specialty homeowners business in Alabama, Louisiana, Mississippi, North Carolina and Texas.

Palomar President, Heath Fisher stated, “Palomar strategically implemented a number of changes to simplify and streamline our program for the betterment of all parties. This decision reflects our commitment to collaborate with our panel to refine the program in a mutually beneficial manner, and we are thrilled at how well our reinsurers responded.

“In the teeth of a challenging market, it is gratifying to see our panel step up and grow their capacity to support our business. This further validates our strong results, unique portfolio, and the work we have put in to develop long-term partnerships that will endure all market cycles. We are grateful for the continued support of our reinsurers.”

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