Universal Insurance Holdings, Inc. (NYSE: UVE), a U.S. primary property and casualty insurer, may look to the catastrophe bond market as a way to tap additional alternative sources of ILS capital as part of its 2015 reinsurance renewal.
The insurers chief operating officer Jon Springer said that tapping additional sources of alternative reinsurance capital at its next renewal in June 2015 may be attractive to Universal, as it seeks to optimise its coverage.
Speaking during the Universal Insurance Holdings third-quarter earnings call, Springer said that the firm would look to find additional efficiency in its reinsurance buy next year.
“We are already in the early stages of exploring the most efficient manner to reinsure our company effective June 1st 2015,” Springer said.
Universal is not a stranger to alternative sources of reinsurance capital, or indeed to the insurance-linked securities (ILS) market, having leveraged efficient sources of reinsurance in 2014 as well.
Universal reported ‘extraordinary cost reductions’ had been achieved at the mid-year reinsurance renewals in 2014. In 2014 third-party reinsurance capital and collateralized reinsurance protection from Nephila Capital played a part in allowing Universal to achieve some of the most competitive reinsurance pricing the firm had seen. For 2015 it seems Universal would like to make the program even more efficient and ILS capital could feature even more.
Springer continued; “This may include utilising the traditional reinsurance market, accessing some alternative capital in the form of a catastrophe bond or some combination of both.”
So cat bonds are clearly on Universal’s radar as one third-party reinsurance capital structure which could bring additional efficiency and perhaps cost-savings to the insurers reinsurance program. The insurer has two wholly owned insurance company subsidiaries, Universal Property & Casualty Insurance Company and American Platinum Property and Casualty Insurance Company, both of which are growing and will provide excellent opportunities to ILS investors and managers seeking additional sources of risk.
Universal would be a first-time cat bond sponsor, which is also positive for the market as attracting first-time sponsors can result in a long-term relationship. Once familiar with the cat bond issuance process and with the structures and processes to support this in place insurers can find coming back repeatedly a much lower-friction process. Hence many first-time sponsors become regular sponsors of cat bonds.
For Universal, the benefits of tapping the capital markets, will of course involve cost, efficiency of capital and also diversification of its reinsurance panel. However a cat bond, if structured intelligently and sympathetically to the overall program, can add features to the coverage that make them even more attractive.
It will be interesting to see whether Universal does indeed sponsor its first catastrophe bond in 2015. We’ll be sure to let you know as soon as we hear anything to that effect.