EGI Financial restructures treaty reinsurance

EGI Financial Holdings Inc. (TSX:EFH) recently completed the restructuring of its treaty reinsurance coverage’s for 2006 in a manner consistent with the general plan previously disclosed.
EGI Financial, as enabled by its greater capital resources, did not renew its quota share reinsurance treaty in 2006 and, in a change from prior years, withdrew the portfolio of non-expired risks from its 2005 quota share treaty, at no penalty.
As a result of this withdrawal, approximately $9.2 million of additional net unearned premiums was recorded in EGI Financial’s balance sheet accounts as at Dec. 31, 2005.
To the extent that the underlying policies remain in force, these premiums will be earned by EGI Financial during the course of 2006. The Company has agreed to pay additional adjustable deposits of $0.2 million to excess of loss and catastrophe reinsurers to protect the Company’s additional net exposure on the run-off of this 2005 policy-year business during 2006.
As of Sept. 30, 2005, EGI Financial’s actuary reported a loss ratio of 74% on the quota share treaty, which generated a ceding commission income rate to the Company of 19%. Consequently, had this business been retained by the Company during the first three quarters of 2005, it would have produced an incremental pre-tax underwriting profit of approximately 7% of the ceded earned premiums.
Management of EGI Financial believes that no deterioration has occurred in this loss ratio in the intervening time.
“We are pleased to take this step, which utilizes our improved financial strength to enhance the earnings outlook of the Company,” Douglas McIntyre, CEO EGI Financial, says.
By the terms of the quota share treaty, on or about March 1, 2006, the reinsurers will return approximately $7.1 million to the Company, being the $9.2 million of ceded unearned premiums less the unearned ceding commission of $2.1 million which had previously been paid by reinsurers to EGI Financial.
Such funds will be added to the Company’s investment portfolio and invested in the normal course, subject to its current investment policy, pending the payment of claims and related claim expenses arising on the business.
In 2006, EGI Financial plans to retain a maximum of $950,000 of primary (i.e. from the first dollar) risk on each claim compared to $450,000 in 2005.
For 2006, EGI Financial has purchased additional excess of loss and catastrophe reinsurance coverage totaling $19,050,000 (in excess of its retention) for any one claim or series of claims arising from one event, compared to $14,550,000 (including the quota share) in 2005.
The Company’s excess of loss and catastrophe reinsurance rates increased from 9.1% of direct written premiums, in 2005, to 12% in 2006, for the same coverage as the Company carried in 2005. However, by retaining the additional primary risk, the Company reduced its cost of excess of loss and catastrophe reinsurance to an aggregate of 9.1% of direct written premiums, including the cost of the additional $5 million of top layer reinsurance coverage.