Insight and Intelligence on (Re)insurance Convergence with the Capital Markets

22 September 2017

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Florida homeowners’ market in balance after Irma

11 September 2017

The common denominator among almost all of Florida's homeowners' carriers is their relatively small capital bases and their heavy reliance on reinsurance.

According to analysis by sister publication The Insurance Insider, the five New York-listed companies - Universal, Heritage, Federated National, HCI Group and United - had a combined catastrophe retention of only $178mn, representing 12 percent of their $1.44bn of shareholders' equity at the end of last year.

Between them the five also have more than $9bn in limit above that to protect them from a first event storm.

They have also built increasingly sophisticated structures that combine vertical and sideways cover through top and drops and similar innovations to cover multiple events, while several also include tranches of multi-year cover.

And a look across a number of other cedants in the Florida homeowners' market reveals a similar ratio of low retention to relatively high amounts of limit purchased, and use of flexible structures.

Even Allstate's Florida-only Castle Key subsidiary has a retention of just $20mn compared to limit in place of $658mn - despite the huge balance sheet of its parent.

Based on modelled return periods, all of the companies are ahead of ratings agency requirements.

Where large nationwide carriers typically buy high-attaching catastrophe reinsurance to protect their balance sheets, Florida's largely single state or regional homeowners' writers buy very low attaching excess of loss covers as well as significant quota shares in some cases.

The larger publicly traded Florida homeowners' carriers have been quick to emphasise the extent of the reinsurance protection they have in place.

The 50+ Demotech-rated companies that dominate the market alongside Citizens should have been anticipating the storm from a position of strength.

After a long period of benign major hurricane activity, there was an opportunity to have significantly built up surplus, while at the recent soft 1 June reinsurance renewal they were able to buy more reinsurance limit to respond more flexibly than ever before.

But instead, they have already posted significant deterioration in underwriting results in the past year, with an industry combined ratio that increased in 2016 to 100.9 percent.

That included 21 companies with combined ratios over 110 percent, and 11 over 125 percent.

In the first quarter this year 40 percent of Florida's carriers suffered underwriting losses, according to a report from JLT Re.

The prime cause has been a surge of losses related to water claims where there has been a so-called assignment of benefits (AOB).


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