PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
INTERNAL MEMORANDUM
FROM: Yuki Nakamura, Lead Associate, and Carlos Espinoza, Working Associate, Calderwood & Harkness LLP
TO: Angela Fontaine, Responsible Partner, Calderwood & Harkness LLP
DATE: October 24, 2025
RE: Key Renewal Terms and Negotiation Strategy — 40% Property Quota-Share Reinsurance Treaty between Quorum Specialty Insurance Company (NAIC No. 42917) and Pinnacle Re Ltd.; January 1, 2026 Treaty Year
MATTER NO.: 1025-00004
CLIENT: Quorum Insurance Holdings Corp. (Nasdaq: QIHC)
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I. Executive Summary
The purpose of this memorandum is to analyze the expiring terms and proposed renewal terms of the property quota-share reinsurance treaty (the "QS Treaty") between Quorum Specialty Insurance Company ("Quorum Specialty" or "QSIC"), the Connecticut-domiciled admitted carrier subsidiary (NAIC No. 42917) of Quorum Insurance Holdings Corp. ("Quorum" or "QIH"), and Pinnacle Re Ltd. ("Pinnacle Re"), a Bermuda Class 4 insurer. This memorandum is intended to support Calderwood & Harkness's internal discussion with you, Angela, and to prepare a recommended negotiation strategy for presentation to the client team in advance of the November 1, 2025 target date for first-draft treaty wording.
The QS Treaty originally incepted on January 1, 2022, and has been renewed annually on substantially similar terms since that date. The current renewal under consideration is for the treaty period January 1, 2026 through December 31, 2026. Pinnacle Re is the sole reinsurer under the QS Treaty, assuming a 40% cession of net written premium on Quorum Specialty's property book. The cession percentage is not expected to change for the 2026 treaty year.
The principal contacts on the cedent side are Suzanne M. Driscoll, Vice President of Reinsurance & Capital Management, and Lionel T. Okafor, General Counsel of Quorum Specialty. On the reinsurer side, the primary negotiation contacts are Derek S. Kimball, Head of Treaty, North America, and Elena Papadimitriou, Chief Underwriting Officer. Pinnacle Re is represented in the renewal negotiations by Harmon, Kessler & Fitch LLP, with partner Nathan R. Kessler and associate Miriam Soto-Flores handling the matter. Blackbridge Advisory Group LLC, the reinsurance intermediary and broker of record (NY DFS License No. RI-00483), is facilitating the renewal process; its managing director, Owen F. Halstead, is the lead broker.
This memorandum accomplishes the following objectives:
1. Summarizes the key commercial terms of the expiring QS Treaty and compares them to the proposed renewal terms under discussion for the January 1, 2026 treaty year.
2. Identifies and analyzes each area of proposed change, including the economic impact of such changes on Quorum Specialty's financial position.
3. Evaluates the interplay between the QS Treaty and the new $35,000,000 xs $15,000,000 catastrophe excess-of-loss ("Cat XOL") layer being placed concurrently through Blackbridge.
4. Recommends specific negotiation positions for each open issue, together with fallback positions and strategic considerations.
5. Identifies regulatory, accounting, and rating agency implications of the proposed terms.
In preparing this memorandum, we have reviewed the expiring treaty wording (dated December 15, 2024), Blackbridge's initial market submission circulated October 17, 2025, and supporting actuarial work product from Meridian Actuarial Partners LLC (lead actuary: Dr. Anita K. Rourke, FCAS). Catastrophe model output referenced herein is from Tempest Analytics CatView v11.2, accessed through Meridian's licensed platform. Financial data is drawn from Quorum Specialty's FY 2024 audited financial statements (audited by Whitfield & Strand LLP, engagement partner Gregory N. Tate) and from internal management reports shared with us by the client.
Our principal recommendation is that Quorum should seek a provisional ceding commission of 33.5% (opening negotiations at 34.0%), push for an improved sliding-scale commission factor, negotiate to narrow the existing loss corridor from a five-point band to a three-point band, maintain the funds withheld arrangement at 25% of ceded premium, and increase the inception-to-date cash loss ratio commutation trigger from 85% to 90%. All treaty drafting should be carefully coordinated with the concurrent Cat XOL placement to ensure consistent definitions and avoid gaps or overlaps in coverage.
II. Background and Treaty History
A. Quorum Specialty — Cedent Profile
Quorum Insurance Holdings Corp. is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol QIHC. The company is headquartered at 400 Constitution Plaza, Suite 2200, Hartford, Connecticut 06103. Quorum's chief executive officer is Desmond R. Hargrove, and its chief financial officer is Priya Chandrasekaran.
Quorum's principal operating subsidiary — and the cedent under the QS Treaty — is Quorum Specialty Insurance Company, a Connecticut-domiciled admitted property and casualty insurance carrier, NAIC No. 42917. Quorum Specialty operates in the specialty property and casualty insurance market, with a particular focus on fintech-enabled commercial lines. The company's property book, which constitutes the subject business under the QS Treaty, has experienced consistent growth over the past several years, driven by a combination of rate hardening in commercial property lines and expansion of Quorum's proprietary digital distribution platform.
The following key financial metrics for Quorum Specialty for fiscal year 2024 are drawn from audited financial statements prepared by Whitfield & Strand LLP (engagement partner: Gregory N. Tate):
Quorum Specialty's A.M. Best financial strength rating, as assigned by Brindoval Rating Services, is A– (Excellent), with a Stable outlook. This rating is an important consideration in the context of the QS Treaty renewal, as Quorum's reinsurance program adequacy is a factor monitored by the rating agency.
B. Pinnacle Re — Reinsurer Profile
Pinnacle Re Ltd. is a Bermuda Class 4 insurer, with its registered office at Cumberland House, 1 Victoria Street, Hamilton HM 11, Bermuda. The company is led by its chief executive officer, Sir Malcolm J. Broadhurst.
Pinnacle Re maintains an A.M. Best financial strength rating of A (Excellent), with a Stable outlook, as assigned by Brindoval Rating Services. This rating is one notch above Quorum Specialty's A– rating, providing the cedent with reinsurance security from a well-regarded counterparty.
Critically for regulatory purposes, Pinnacle Re holds a New York Department of Financial Services ("NYDFS") Certified Reinsurer designation, ID No. CR-2019-0217. This certification is relevant to collateral considerations under the QS Treaty. Under 11 NYCRR 125, Quorum Specialty — though domiciled in Connecticut, which has adopted substantially equivalent provisions through its adoption of the NAIC Credit for Reinsurance Model Law — is able to take statutory reinsurance credit for cessions to Pinnacle Re without requiring Pinnacle Re to post collateral in a trust or letter of credit. The current QS Treaty does not include a trust or collateral requirement, and this arrangement is expected to continue for the 2026 renewal. The funds withheld structure discussed in Section III.G below provides additional credit support independent of collateral posting.
Pinnacle Re has been the sole reinsurer on the QS Treaty since the treaty's original inception on January 1, 2022, maintaining a consistent 40% participation level throughout the treaty's history.
C. Treaty History
The QS Treaty originally incepted on January 1, 2022, and has been renewed annually on substantially similar terms for each successive treaty year. The treaty operates on a risks-attaching basis, with each annual treaty period running from January 1 through December 31 of the relevant year.
During the first three treaty years (2022–2024), the commercial terms remained relatively stable. The ceding commission was established at 31.0% for the 2022 treaty year, increased modestly to 31.5% for the 2023 treaty year, and was further increased to 32.0% for the 2024 and 2025 (expiring) treaty years. The cession percentage has remained constant at 40% throughout. The loss corridor (75%–80% loss ratio band retained by Quorum), funds withheld arrangement (25% of ceded premium), per-risk retention ($2,500,000 net of QS), and per-occurrence limit ($25,000,000) have all remained unchanged since inception.
The 2026 renewal presents a meaningful opportunity to update the treaty's commercial terms for several reasons. First, Quorum Specialty's loss experience over the life of the treaty has been favorable, with an inception-to-date cash loss ratio of approximately 62%–65% as analyzed by Meridian Actuarial Partners LLC. Second, Quorum's property book has experienced significant premium growth, with gross written premium increasing from approximately $245,000,000 at inception to $312,000,000 in FY 2024, and projected to reach $338,000,000 in 2026. Third, market conditions have shifted in favor of cedents with strong underwriting track records. Finally, the concurrent placement of a new Cat XOL layer ($35,000,000 xs $15,000,000) introduces a complementary element to Quorum's reinsurance program that has implications for the QS Treaty's loss corridor, per-occurrence cap, and overall risk-sharing architecture.
III. Comparison of Expiring vs. Proposed Terms
A. Summary Table
The following table provides a side-by-side comparison of the key commercial terms under the expiring QS Treaty (January 1, 2025 – December 31, 2025) and the proposed terms for the renewal treaty year (January 1, 2026 – December 31, 2026):
The sections that follow analyze each of these parameters in detail.
B. Cession Percentage
Expiring: 40% of net written premium on Quorum Specialty's property book.
Proposed: 40% of net written premium on Quorum Specialty's property book — unchanged.
The 40% cession level has been consistent since the treaty's inception on January 1, 2022. No change to the cession percentage is contemplated for the 2026 treaty year. Quorum Specialty's capital management strategy relies on the 40% cession to manage net underwriting leverage and earnings volatility. The cession allows Quorum to maintain a manageable net premium-to-surplus ratio while pursuing premium growth on the gross side. At the projected 2026 gross written premium of $338,000,000, the cession will generate $135,200,000 in ceded premium, leaving Quorum with net retained premium on the property book of approximately $202,800,000.
From a capital efficiency perspective, the 40% cession results in a net premium-to-surplus ratio on the property book alone of approximately 42.4% ($202,800,000 ÷ $478,000,000), well within the range that Brindoval Rating Services considers appropriate for Quorum's A– rating level. Without the cession, the gross premium-to-surplus ratio on the property book would be approximately 70.7% ($338,000,000 ÷ $478,000,000), which, while not alarming in isolation, would reduce Quorum's available capacity for growth and increase volatility metrics that the rating agency monitors.
C. Projected Premium Base
Quorum Specialty's property book generated $312,000,000 in gross written premium for fiscal year 2024. Based on management's projections and Blackbridge's market assessment, gross written premium on the property book is projected to reach $338,000,000 for fiscal year 2026, representing approximately 8.3% year-over-year growth. This growth is driven by two principal factors: (i) rate hardening in commercial property lines, which is expected to continue through 2026 based on current market conditions, and (ii) Quorum's continued expansion of its fintech distribution platform, which is enabling access to new distribution channels and geographic markets.
At the 40% cession level, the projected 2026 ceded premium is:
$338,000,000 × 40% = $135,200,000
The premium growth trajectory is a significant factor in the ceding commission negotiation. Pinnacle Re benefits directly from a larger premium volume — the absolute dollar amount of premium flowing to the reinsurer increases by approximately $10,400,000 compared to the estimated 2025 ceded premium. Even with a higher ceding commission rate, the absolute dollar amount of premium retained by Pinnacle Re (net of commission) will increase relative to prior treaty years. This dynamic should support Quorum's request for enhanced commission terms, and Blackbridge has indicated that Pinnacle Re's underwriting team recognizes the value of a growing, profitable portfolio.
D. Ceding Commission
Expiring: 32.0% of ceded premium (fixed provisional).
Proposed: 33.5% of ceded premium (provisional, subject to sliding-scale adjustment).
Change: Increase of 1.5 percentage points on the provisional rate.
The proposed increase from 32.0% to 33.5% represents a meaningful enhancement for Quorum Specialty. On projected 2026 ceded premium of $135,200,000, each percentage point of ceding commission equals approximately $1,352,000 in commission income to Quorum Specialty. The 1.5-point increase therefore represents approximately $2,028,000 in additional ceding commission income relative to the expiring rate, assuming the same ceded premium base. When account is taken of the premium growth (from an estimated $124,800,000 in 2025 to $135,200,000 in 2026), the total increase in commission income is even more substantial.
The justification for the commission increase rests on several independent grounds:
First, Quorum Specialty's 2024 net combined ratio of 94.7% — and improving loss development trends identified by Meridian Actuarial Partners LLC — demonstrates that the property book continues to deliver profitable results to Pinnacle Re. The inception-to-date loss experience on the ceded business has been favorable, with the cash loss ratio running at approximately 62%–65%.
Second, market intelligence compiled by Blackbridge Advisory Group LLC indicates that comparable cedents with similar loss experience profiles are achieving ceding commission levels in the range of 33%–34% in the current renewal cycle. The proposed 33.5% provisional is thus consistent with prevailing market terms and does not represent an outlier.
Third, the premium growth from $312,000,000 to a projected $338,000,000 provides Pinnacle Re with a significantly larger revenue base. Even at the higher commission rate, Pinnacle Re's net premium retained (after commission) will be approximately $89,908,000 at 33.5%, compared to an estimated $84,864,000 at 32.0% on 2025 volumes. In absolute terms, Pinnacle Re's retained premium increases despite the higher commission rate.
An additional consideration for the 2026 renewal is that the expiring treaty's commission was fixed (i.e., not subject to sliding-scale adjustment), whereas the proposed 2026 treaty introduces a sliding-scale mechanism. The introduction of the sliding scale means that Pinnacle Re obtains downside protection — if loss experience deteriorates, the commission adjusts downward to a minimum of 30.0%. This risk-sharing element should be viewed as a concession by Quorum that supports the higher provisional rate.
E. Sliding-Scale Commission Parameters
The 2026 proposed renewal introduces a sliding-scale ceding commission mechanism, which was not a feature of the expiring or prior treaty years. The key parameters of the sliding scale are as follows:
Commission Range: Minimum 30.0% / Maximum 36.0%
Provisional Commission: 33.5%
Slide Factor: 1 point of commission adjustment per 2.5 points of loss ratio movement
The sliding-scale range spans 6.0 percentage points, from a floor of 30.0% to a ceiling of 36.0%. The midpoint of this range is 33.0%, and the provisional commission of 33.5% sits slightly above center. This positioning reflects Quorum's expectation — supported by Meridian's actuarial analysis — that the base-case loss ratio will be favorable enough to support a commission settlement above the provisional level.
The slide factor operates as follows: for each 2.5 percentage points of loss ratio movement from the target loss ratio, the commission adjusts by 1.0 percentage point. Two illustrative examples clarify the mechanics:
Example 1 — Adverse scenario: If the loss ratio on the ceded business deteriorates from the breakeven target by 5.0 points, the commission decreases by 2.0 points (5.0 ÷ 2.5 = 2.0), resulting in a commission of 33.5% − 2.0% = 31.5%.
Example 2 — Favorable scenario: If the loss ratio improves from the breakeven target by 5.0 points, the commission increases by 2.0 points (5.0 ÷ 2.5 = 2.0), resulting in a commission of 33.5% + 2.0% = 35.5%, subject to the 36.0% cap.
Several negotiation considerations arise from the sliding-scale parameters:
Slide Factor. The proposed slide factor of 1:2.5 (one point of commission per 2.5 points of loss ratio) is within market norms but is slightly more favorable to the reinsurer than the 1:3.0 ratio that Quorum originally requested during preliminary discussions. Under a 1:3.0 slide factor, the commission would decrease more slowly in adverse loss scenarios, providing Quorum with greater stability. Conversely, the commission would also increase more slowly in favorable scenarios. On balance, the 1:3.0 factor is more protective of the cedent's interests, and we recommend maintaining this as a negotiation objective. The difference is material in tail scenarios: under a 1:2.5 slide with a 10-point adverse loss ratio swing, the commission drops by 4.0 points (to 29.5%, floored at 30.0%); under a 1:3.0 slide, the same swing produces only a 3.33-point decrease (to 30.17%).
Floor and Ceiling. The 30.0% minimum commission protects Pinnacle Re in adverse loss scenarios, ensuring that even in a poor underwriting year, Pinnacle Re retains at least 70% of ceded premium (before considering losses). The 36.0% maximum provides meaningful upside for Quorum if loss experience is favorable. We believe these boundaries are reasonable and do not recommend seeking changes to them, as adjusting the boundaries would likely require concessions on other terms.
Base-Case Projection. Meridian's loss development analysis, which incorporates historical loss patterns from the 2022–2024 treaty years and current underwriting data, suggests a base-case loss ratio for the 2026 treaty year that would result in the commission settling near 34.0%–34.5% under the proposed sliding scale. This represents meaningful upside from the 33.5% provisional, translating to approximately $675,000–$1,352,000 in additional commission income above the provisional level.
Calculation Methodology. The sliding-scale commission is calculated on an earned-premium, incurred-loss basis, adjusted annually. This means that interim quarterly payments will be made at the provisional commission rate of 33.5%, with an annual adjustment based on actual earned premium and incurred losses. The treaty wording should clearly address the timing and mechanics of settlement adjustments, including (i) when the annual adjustment is calculated, (ii) how IBNR reserves are treated in the incurred loss determination, (iii) whether there is a development period before the final commission rate is locked, and (iv) how disputed claims are handled in the loss ratio calculation. These are drafting points that we will address in the first-draft treaty wording.
F. Loss Corridor
Under the existing treaty structure, Quorum retains 100% of losses falling within the 75%–80% loss ratio band on the ceded business. This loss corridor operates as follows: Pinnacle Re assumes its proportionate 40% share of losses up to a 75% loss ratio; within the 75%–80% loss ratio band, Quorum bears the entirety of losses (i.e., Pinnacle Re's participation in that band is reduced to zero); above the 80% loss ratio level, Pinnacle Re's 40% proportionate participation resumes.
The loss corridor has been a feature of the QS Treaty since inception and is proposed to continue without modification in the 2026 renewal. However, we believe this is a term worth revisiting in light of changed circumstances, and we recommend that Quorum propose modifications.
Purpose and Function. The loss corridor functions as a risk-sharing mechanism that aligns Quorum's underwriting discipline with Pinnacle Re's exposure. By requiring Quorum to absorb the full impact of losses in the 75%–80% band, the corridor incentivizes Quorum to avoid underwriting actions or claim practices that would push the loss ratio into that zone. From Pinnacle Re's perspective, the corridor effectively caps its exposure in the moderate-severity loss layer, ensuring that the first tranche of deterioration beyond a 75% loss ratio is borne by the cedent.
Dollar Impact. On projected 2026 ceded premium of $135,200,000, the 5-point loss corridor represents a potential additional loss retention for Quorum of $135,200,000 × 5% = $6,760,000 in the scenario where the loss ratio falls within or passes through the corridor band.
Negotiation Position. We recommend that Quorum seek to narrow this corridor from the current 75%–80% band to a 76%–79% band (a 3-point band rather than a 5-point band). This would reduce the maximum additional retention from $6,760,000 to $4,056,000. Alternatively, we recommend proposing that the corridor apply only to attritional losses, with catastrophe losses (defined consistently with the Cat XOL contract's occurrence definition, including the 168-hour hours clause for windstorm events) excluded from the corridor calculation entirely. This alternative approach is conceptually appealing because catastrophe losses are driven by exogenous events rather than underwriting discipline, and Quorum's underwriting incentives are adequately addressed by applying the corridor to attritional losses alone.
Interaction with the Cat XOL Layer. The concurrent placement of the $35,000,000 xs $15,000,000 Cat XOL layer introduces important interplay with the loss corridor. Losses recovered under the Cat XOL layer will be net of QS recoveries — that is, the Cat XOL attaches to Quorum's retained share (60%) of property catastrophe losses. However, the loss corridor's treatment of catastrophe-driven losses needs careful analysis. In a severe catastrophe year, the 75%–80% loss ratio corridor on the QS ceded book could be breached rapidly by a single large event. If catastrophe losses are included in the corridor calculation, Quorum would bear the full impact of the corridor band before Pinnacle Re's participation resumes above the 80% level, which could compound Quorum's catastrophe loss exposure at precisely the moment when the QS Treaty's protection is most needed. We have asked Meridian to confirm how large-cat scenarios interact with the corridor calculation under several drafting alternatives and expect to receive that analysis by October 31, 2025.
Pinnacle Re will likely resist changes to the loss corridor, given that it was a condition of the original treaty and has been maintained for four consecutive treaty years. However, the placement of the Cat XOL layer — which Pinnacle Re is leading at a 50% participation — provides a natural basis for the argument that the risk profile underlying the QS Treaty has improved, and the corridor should be adjusted accordingly.
G. Funds Withheld
Percentage: 25% of ceded premium is withheld by Quorum Specialty.
Investment Credit: 3-month SOFR + 75 basis points, credited to Pinnacle Re on the withheld balance.
On projected 2026 ceded premium of $135,200,000, the dollar amount of funds withheld is:
$135,200,000 × 25% = $33,800,000
The funds withheld arrangement serves a dual purpose. First, it provides Quorum Specialty with use of a portion of ceded premium as a de facto financing mechanism. The withheld funds remain on Quorum Specialty's balance sheet as a liability owed to Pinnacle Re, but Quorum retains the use of those funds for investment purposes, earning its own portfolio yield on the balance. Second, the arrangement enhances Quorum's reinsurance credit position by ensuring that a portion of ceded premium is retained on the cedent's balance sheet, providing an additional layer of security beyond Pinnacle Re's certified reinsurer status.
In the current interest rate environment, the crediting rate is a meaningful cost to Quorum Specialty. With 3-month SOFR currently in the range of approximately 4.5%–5.0%, the effective crediting rate (SOFR + 75 bps) is approximately 5.25%–5.75%. On a withheld balance of $33,800,000, this translates to annual crediting costs in the range of approximately $1,774,500–$1,943,500. Quorum should evaluate its own investment yield on the withheld funds against this crediting rate to ensure the arrangement remains economically beneficial on a net basis. If Quorum's investment portfolio is generating returns below the crediting rate, the funds withheld arrangement becomes a net cost rather than a net benefit from a pure investment-return perspective — though the balance-sheet and credit-protection benefits remain.
We anticipate that Pinnacle Re may request a reduction in the funds withheld percentage from 25% to 20% as part of the renewal negotiations. Pinnacle Re's likely argument would be that its certified reinsurer status under 11 NYCRR 125 (NYDFS Certified Reinsurer ID CR-2019-0217) already provides adequate reinsurance credit support, making the 25% withholding unnecessarily burdensome to the reinsurer's cash flow. We recommend that Quorum firmly resist any reduction, as the funds withheld serve the dual purpose described above, and the arrangement has been a stable feature of the treaty since inception. Any reduction in the withheld percentage would diminish Quorum's balance-sheet benefits and marginally weaken its credit protection.
As a proactive measure, we recommend that Quorum consider proposing a cap on the crediting rate (e.g., 6.0% all-in) to protect against cost escalation in a rising-rate environment. While current market expectations suggest that the Federal Reserve may ease monetary policy in 2026, rate uncertainty warrants a prudent approach to managing this variable cost.
H. Per-Risk Retention
Net of QS retention: $2,500,000 any one risk.
After the 40% cession to Pinnacle Re, Quorum Specialty retains $2,500,000 per individual risk. On a gross basis, this implies that Quorum Specialty's maximum per-risk gross exposure under the property book is approximately $4,166,667 (i.e., $2,500,000 ÷ 0.60), as 40% of the gross loss on any single risk is ceded to Pinnacle Re under the QS Treaty.
The per-risk retention is unchanged from the expiring treaty and has been constant since inception. The retention amount is adequate relative to Quorum Specialty's statutory surplus of $478,000,000, representing approximately 0.52% of surplus per risk. This ratio is well within the underwriting guidelines typically expected by rating agencies for a carrier of Quorum's size and risk profile, and is consistent with Brindoval Rating Services' expectations for the A– rating level.
No change to the per-risk retention is proposed or recommended. The retention level appropriately balances Quorum's desire for meaningful risk participation with the treaty's role in managing per-risk volatility.
I. Maximum Per-Occurrence Limit
Maximum per-occurrence limit to the QS Treaty: $25,000,000.
Pinnacle Re's 40% share of this limit: $10,000,000.
The per-occurrence limit caps Pinnacle Re's maximum exposure under the QS Treaty for any single occurrence at $10,000,000 (being its 40% share of the $25,000,000 treaty-level cap). This limit protects Pinnacle Re from catastrophic aggregation of individual risk losses within a single occurrence. In a catastrophic event affecting multiple insured risks, Pinnacle Re's share of QS Treaty losses is capped at $10,000,000 regardless of the aggregate amount of qualifying losses.
This cap operates independently of the Cat XOL layer being placed concurrently. The interplay between these two treaties requires careful coordination:
Under the Cat XOL, Quorum Specialty's net-of-QS occurrence retention is $15,000,000, and the Cat XOL layer provides $35,000,000 of coverage excess of $15,000,000, for a total program protection up to $50,000,000 per occurrence on a net-of-QS basis.
Under the QS Treaty, the $25,000,000 per-occurrence cap means that for any occurrence generating more than $25,000,000 in gross losses to the QS subject business, Pinnacle Re's exposure is capped at $10,000,000 (40% × $25,000,000), and Quorum retains $15,000,000 (60% × $25,000,000) plus 100% of gross losses above $25,000,000.
The Cat XOL attaches at Quorum's $15,000,000 net occurrence retention. In a scenario where gross occurrence losses reach $25,000,000, Quorum's net retention is $15,000,000 (60% of $25,000,000), which is exactly the Cat XOL attachment point. If gross losses exceed $25,000,000, Quorum's net retention exceeds $15,000,000, and the Cat XOL begins to respond.
The alignment between the QS Treaty's per-occurrence cap and the Cat XOL attachment point requires careful drafting to avoid gaps. Specifically, the treaty wordings must ensure that: (i) losses are allocated consistently between the QS Treaty and the Cat XOL; (ii) the QS Treaty's per-occurrence cap is calculated on a basis consistent with the Cat XOL's occurrence definition; and (iii) the 168-hour hours clause and other aggregation provisions are applied uniformly.
We do not recommend changes to the $25,000,000 per-occurrence limit. Pinnacle Re may request a reduction given the presence of the new Cat XOL layer, but the current limit is appropriate relative to Quorum's exposure profile and provides adequate protection to both parties. If anything, the placement of the Cat XOL layer makes the per-occurrence limit less likely to bind, which is a point Quorum can raise to resist any reduction.
J. Cash Loss Ratio Trigger for Commutation
Trigger level: 85% on an inception-to-date ("ITD") basis.
Under the commutation provision, if the cash loss ratio on the ceded business reaches 85% on an ITD basis — measured from the original inception date of January 1, 2022 — either party may elect to commute the treaty. Commutation would result in a full settlement of all outstanding obligations under the treaty, including unearned premium reserves, outstanding loss reserves, and IBNR, with the specific settlement mechanics to be determined at the time of commutation.
The current ITD cash loss ratio through December 31, 2024 is approximately 62%–65%, as analyzed by Meridian Actuarial Partners LLC. This is well below the 85% trigger, and there is significant headroom before the trigger would be reached under any reasonable near-term scenario. However, the treaty has been in force for only three full years, and the cumulative premium denominator, while growing, has not yet reached a level where it would be difficult for a severe loss year to significantly move the ITD ratio. As the treaty matures and the cumulative premium base continues to grow with Quorum's premium expansion, the denominator effect will provide increasing natural protection against single-year loss spikes triggering the provision.
We recommend that Quorum propose increasing the commutation trigger from 85% to 90% ITD. This adjustment would provide additional protection against premature commutation in a scenario where a single adverse year — particularly a severe catastrophe year — temporarily elevates the ITD loss ratio. With the cumulative premium base growing each year, the 5-point increase in the trigger is a modest concession for Pinnacle Re but provides meaningful protection for Quorum. If Pinnacle Re resists this change, Quorum could alternatively propose that the commutation right be exercisable only after the ITD loss ratio has exceeded the trigger for two consecutive quarterly measurement periods, rather than on a point-in-time basis.
IV. Economic Analysis
A. Commission Income Impact
The proposed increase in the provisional ceding commission from 32.0% to 33.5% generates meaningful incremental income for Quorum Specialty. On the projected 2026 ceded premium base of $135,200,000:
At the proposed 33.5% provisional commission:
Commission income to Quorum Specialty: $135,200,000 × 33.5% = $45,292,000
At the expiring 32.0% commission rate:
Commission income would have been: $135,200,000 × 32.0% = $43,264,000
The incremental commission attributable to the 1.5-point rate increase is therefore approximately $2,028,000.
If loss experience supports a commission settlement at the 34.5% level — which is within the range of Meridian's base-case projection — commission income would reach $135,200,000 × 34.5% = $46,644,000, representing an additional $1,352,000 above the provisional and $3,380,000 above the expiring rate.
Conversely, in an adverse scenario where the sliding scale drives the commission to its 30.0% minimum, commission income would be $40,560,000, representing a $2,704,000 decrease from the expiring 32.0% rate. This downside scenario should be weighed against the upside potential, but based on Meridian's analysis of historical loss patterns and current underwriting trends, the probability of the commission settling at or near the minimum is low.
B. Brokerage Commission
Blackbridge Advisory Group LLC receives a brokerage commission of 1.25% of ceded premium on the QS Treaty. This is a standard brokerage rate for a treaty of this type and has been unchanged since inception.
On the projected 2026 ceded premium:
Brokerage cost: $135,200,000 × 1.25% = $1,690,000
The brokerage commission is a pass-through cost deducted from ceded premium before remittance to Pinnacle Re. It is borne by the reinsurer and does not reduce Quorum Specialty's ceding commission. However, it is relevant to Pinnacle Re's net economics on the treaty and may indirectly influence Pinnacle Re's willingness to concede on commission and other terms. We note that the brokerage rate has not been renegotiated and Blackbridge has not requested an increase, which is a favorable data point.
C. Funds Withheld Economics
On the projected 2026 funds withheld balance of $33,800,000:
Crediting rate: 3-month SOFR + 75 bps
Assuming 3-month SOFR at approximately 4.80% (current market): effective crediting rate = 5.55%
Annual crediting cost to Quorum Specialty: $33,800,000 × 5.55% = $1,875,900
This crediting cost represents the economic cost to Quorum of the funds withheld arrangement. Quorum should evaluate this cost against (i) its own portfolio investment yield on the $33,800,000 in withheld funds, and (ii) the alternative cost of providing reinsurance credit support through a trust or letter of credit (which Pinnacle Re's certified reinsurer status currently eliminates). If Quorum's investment portfolio yield exceeds the crediting rate, the arrangement generates positive carry for Quorum. If the portfolio yield falls below the crediting rate, the arrangement results in a net investment cost, though the balance-sheet and credit-protection benefits may still justify the arrangement on a holistic basis.
We also note that the crediting rate is variable, floating with 3-month SOFR. In a scenario where SOFR increases materially — for example, to 6.0% or higher — the all-in crediting rate would exceed 6.75%, increasing the annual cost to approximately $2,281,500. This sensitivity underscores our recommendation in Section VI.D below that Quorum propose a cap on the crediting rate.
D. Net Treaty Economics Summary
The following table summarizes the net economic impact of the QS Treaty on Quorum Specialty for the projected 2026 treaty year:
The net commission income of approximately $43.4 million represents a significant offset to Quorum's ceded premium. On a net basis, Quorum retains $202,800,000 in premium plus $43,416,100 in net commission income (after funds withheld crediting costs), for an effective net premium retention of approximately $246,216,100, or 72.8% of gross property premium. The QS Treaty thus reduces Quorum's effective premium retention by approximately 27.2%, but the ceding commission substantially offsets the premium ceded, making the treaty an efficient form of reinsurance and capital management.
For comparison, at the expiring 32.0% commission rate (assuming the same projected premium base), net commission income after crediting costs would have been approximately $41,388,100 ($43,264,000 − $1,875,900). The proposed terms therefore represent an incremental net benefit of approximately $2,028,000 at the provisional commission level, with additional upside potential under the sliding scale.
V. Actuarial and Modeling Considerations
A. Meridian Actuarial Partners LLC Analysis
Meridian Actuarial Partners LLC has been engaged by Quorum Specialty to provide loss development analysis and catastrophe-model review in support of the QS Treaty renewal. The engagement is led by Dr. Anita K. Rourke, FCAS, who serves as lead actuary on the matter. Meridian's offices are located at 1 Ashbury Asset Advisors, Suite 800, Hartford, Connecticut 06103.
Meridian's key findings, as summarized in their preliminary actuarial report dated October 14, 2025, are as follows:
Favorable Loss Development. Loss development on prior treaty years (2022–2024) has been consistently favorable. Ultimate loss ratios for all three treaty years are trending below the initial actuarial picks established at each treaty's inception. For the 2022 treaty year, the initial ultimate loss ratio pick was 61%; current development indicates an ultimate closer to 56%. For the 2023 treaty year, the initial pick of 60% has developed to approximately 57%. For the 2024 treaty year, while development is still immature, early indications suggest a trajectory consistent with an ultimate in the 55%–58% range.
Stable Attritional Loss Ratio. The attritional loss ratio on Quorum Specialty's property book — excluding catastrophe and large losses — has been stable at approximately 55%–58% across all treaty years. This stability reflects the consistency and discipline of Quorum's underwriting approach and provides a reliable foundation for pricing the 2026 renewal.
Below-Expected Large-Loss Frequency. Large-loss frequency (defined by Meridian as individual risk losses exceeding $1,000,000) has been below actuarial expectations during the 2022–2024 treaty years. While this could partially reflect favorable randomness rather than structural underwriting improvement, the sustained pattern over three consecutive years provides support for the view that Quorum's underwriting standards are producing better-than-expected results.
Support for Increased Ceding Commission. Taken together, these trends strongly support Quorum's request for an increased ceding commission. The ceded book has been profitable for Pinnacle Re throughout the treaty's history, and the improving development trends suggest that profitability is likely to continue. Meridian's base-case loss ratio projection for the 2026 treaty year, incorporating both attritional and catastrophe-loaded components, is in the range that would result in a sliding-scale commission settlement near 34.0%–34.5%.
We recommend that the loss development patterns and supporting data provided by Meridian be compiled as an exhibit to the final negotiation package for Blackbridge to share with Pinnacle Re's underwriting team (Derek S. Kimball and Elena Papadimitriou). The favorable development story is one of Quorum's strongest arguments for enhanced commission terms, and presenting it in a structured, transparent manner will support the negotiation.
B. Catastrophe Model Output
The catastrophe exposure assessment for the QS Treaty renewal is based on output from Tempest Analytics CatView v11.2, a proprietary catastrophe model accessed by Meridian through its licensed platform. The model output reflects Quorum Specialty's current property book exposure, including geographic distribution, construction characteristics, and policy terms.
The key modeled metric is:
250-Year Modeled Probable Maximum Loss (Net of QS): $52,000,000
This figure represents the net-of-QS loss at the 250-year return period — that is, there is an estimated 0.4% probability that Quorum Specialty's net retained loss from a single catastrophe occurrence will exceed $52,000,000 in any given year, after receiving its 40% recovery under the QS Treaty.
The 250-year PML of $52,000,000 exceeds the QS Treaty's $25,000,000 per-occurrence cap by a significant margin. Specifically, at the 250-year return period, the implied gross occurrence loss would be approximately $86,667,000 (back-solving: if net-of-QS is $52,000,000, and the QS cedes 40% up to its $25,000,000 cap, the gross loss = $52,000,000 + $10,000,000 [Pinnacle Re's 40% share of $25,000,000] = $62,000,000 before the cap, but losses above the cap are 100% Quorum). This confirms the importance of the separate Cat XOL layer ($35,000,000 xs $15,000,000) being placed concurrently. The Cat XOL will respond to net-of-QS occurrence losses between $15,000,000 and $50,000,000, providing meaningful protection at the 250-year PML level.
As a percentage of surplus, the Cat XOL limit represents:
$35,000,000 ÷ $478,000,000 ≈ 7.3% of policyholder surplus
The catastrophe model output also informs the loss corridor analysis under the QS Treaty. In a severe catastrophe year, a single major event could drive the QS Treaty loss ratio through the 75%–80% corridor rapidly. For example, if a catastrophe event generates $40,000,000 in gross losses to the QS subject business, the ceded loss (before the corridor and before the per-occurrence cap) would be $16,000,000 (40% × $40,000,000, capped at $10,000,000 under the per-occurrence limit). On ceded premium of $135,200,000, a ceded occurrence loss of $10,000,000 represents approximately 7.4 loss ratio points. If the attritional loss ratio is running at, say, 57%, a single severe cat event could push the total loss ratio to approximately 64.4% — still below the corridor. However, in a multi-event year, or in a year with both cat and elevated attritional losses, the corridor could be reached.
We recommend seeking clarity in the treaty wording on how catastrophe losses are allocated through the loss corridor. Specifically, the wording should address whether the corridor calculation is applied on a cumulative annual basis (in which case a late-year catastrophe event that pushes the loss ratio through the corridor would trigger the corridor for all losses in the band) or on an incremental basis (with catastrophe losses potentially excluded or addressed separately). Our preference, as noted in Section VI.C, is to exclude catastrophe losses from the corridor calculation entirely.
VI. Open Issues and Recommended Negotiation Positions
Based on our analysis of the expiring and proposed terms, the following issues remain open for negotiation. For each issue, we provide our recommended opening position, target settlement, and fallback.
A. Ceding Commission Level
Recommendation: Open negotiations at 34.0% and target a settlement at 33.5%.
The 33.5% provisional commission level is well-supported by Quorum Specialty's favorable loss experience, the positive findings of Meridian's actuarial analysis, and Blackbridge's market intelligence regarding comparable cedent commission levels in the current renewal cycle. Opening at 34.0% provides negotiating room while signaling to Pinnacle Re that Quorum is aware of its market value.
We recommend being prepared to compromise at 33.0% if necessary — for example, if Pinnacle Re makes concessions on the loss corridor or other terms that offset the commission reduction — but we strongly recommend that Quorum not accept a provisional commission below 33.0%. At 33.0%, the incremental benefit over the expiring 32.0% is $1,352,000, which is the minimum acceptable outcome for this negotiation cycle given the strength of Quorum's underwriting performance.
Rationale: The projected premium growth to $338,000,000 provides Pinnacle Re with a significantly larger premium base, generating additional absolute dollar premium even at a higher commission rate. Quorum's 94.7% combined ratio in FY 2024, improving loss development trends, and below-expected large-loss frequency all demonstrate the disciplined underwriting that supports a premium commission level.
B. Sliding-Scale Parameters
Recommendation: Accept the 30.0%–36.0% range but push for a more favorable slide factor of 1 point of commission per 3.0 points of loss ratio movement (rather than the proposed 1 point per 2.5 points).
The 1:3.0 slide factor would slow the rate at which the commission decreases in adverse loss scenarios, providing Quorum with greater commission stability and reducing the downside risk of the sliding-scale mechanism. Under the 1:3.0 slide, a 5-point deterioration in loss ratio would result in only a 1.67-point commission decrease (compared to 2.0 points under the proposed 1:2.5 slide). In a severe scenario with a 10-point adverse swing, the difference is more pronounced: 3.33 points of commission decrease under 1:3.0 versus 4.0 points under 1:2.5.
Fallback: Accept the 1:2.5 slide factor if Pinnacle Re concedes on the loss corridor narrowing (from 75%–80% to 76%–79%) or on the exclusion of catastrophe losses from the corridor calculation. These two items are natural trade-off candidates, as both relate to the risk-sharing architecture of the treaty. We recommend that Quorum's negotiation team be authorized to trade one against the other, and that the relative value of each concession be quantified in advance with Meridian's assistance.
C. Loss Corridor
Recommendation: Propose narrowing the loss corridor from 75%–80% to 76%–79% (reducing the band from 5 points to 3 points). Alternatively, propose that catastrophe losses — defined consistently with the Cat XOL contract's occurrence definition, including the 168-hour hours clause for windstorm events — be excluded from the corridor calculation.
Of these two alternatives, the catastrophe exclusion is conceptually preferable because it addresses the root concern (that exogenous catastrophe events should not drive corridor activation) without requiring a change to the corridor's absolute boundaries. However, the narrowing approach is simpler to implement and easier to explain, and may be more palatable to Pinnacle Re.
Rationale: With the concurrent placement of the Cat XOL layer, Quorum's risk profile has materially improved relative to the original treaty year when the corridor was established. The Cat XOL provides $35,000,000 of additional protection for net-of-QS catastrophe losses, which inures to Pinnacle Re's benefit by reducing the probability of extreme loss scenarios under the QS Treaty. The corridor should be adjusted to reflect this reduced volatility exposure.
Dollar Impact: Narrowing the corridor from 5 points to 3 points reduces Quorum's maximum additional corridor retention from $6,760,000 to $4,056,000 on projected 2026 ceded premium — a difference of $2,704,000.
D. Funds Withheld
Recommendation: Maintain the funds withheld arrangement at 25% of ceded premium with a crediting rate of 3-month SOFR + 75 basis points. Resist any request by Pinnacle Re to reduce the withheld percentage.
We also recommend proposing a cap on the crediting rate of 6.0% all-in (i.e., the crediting rate would be the lesser of 3-month SOFR + 75 bps and 6.0%). This cap would protect Quorum against escalating crediting costs in a rising-rate environment while leaving the current effective rate unchanged (since the current all-in rate of approximately 5.55% is below the proposed cap).
If Pinnacle Re resists the 6.0% cap, Quorum could accept a higher cap of 6.50% as a fallback, which would still provide meaningful protection in an extreme rate scenario.
E. Per-Occurrence Limit
Recommendation: Maintain the $25,000,000 per-occurrence limit. If Pinnacle Re requests a reduction, Quorum should resist on the grounds that the limit is appropriate relative to Quorum's exposure profile and that the Cat XOL layer makes the limit less likely to bind in any given year, reducing the marginal cost to Pinnacle Re of maintaining the current level.
F. Commutation Trigger
Recommendation: Propose increasing the cash loss ratio commutation trigger from 85% to 90% on an ITD basis.
The current ITD cash loss ratio of approximately 62%–65% provides substantial headroom below the 85% trigger. However, as discussed in Section III.J, a single severe loss year could narrow this headroom materially, particularly as the treaty is still relatively young and the cumulative premium denominator, while growing, does not yet provide the stabilizing effect of a long-tenured treaty. Increasing the trigger to 90% provides additional protection against premature commutation while still preserving a meaningful safety valve for both parties.
Alternative: If Pinnacle Re resists the increase, propose adding a temporal requirement — for example, requiring that the ITD loss ratio exceed the trigger for two consecutive quarterly measurement periods before a commutation election may be exercised. This would prevent a single quarterly spike (which might be driven by timing of large loss payments) from triggering the provision.
G. Treaty Drafting and Documentation
We propose the following drafting timeline:
November 1, 2025: Target date for distribution of first-draft QS Treaty wording (amended and restated from the expiring treaty to incorporate all agreed changes for the 2026 treaty year). Calderwood & Harkness will prepare the initial draft in collaboration with Quorum Specialty's in-house team (Lionel T. Okafor).
November 1–15, 2025: Initial review and comment period. Drafts to be circulated to Harmon, Kessler & Fitch LLP (Nathan R. Kessler and Miriam Soto-Flores) for Pinnacle Re's review.
November 15–25, 2025: Negotiation and mark-up of treaty wording. We anticipate one to two rounds of mark-ups, with a possible in-person or virtual negotiation session during this period.
December 1, 2025: Target signing date for the renewed QS Treaty and the new Cat XOL contract.
January 1, 2026: Treaty effective date — renewed QS Treaty inception.
H. Coordination with Cat XOL Placement
The QS Treaty renewal and the new Cat XOL placement are being negotiated in parallel, and Blackbridge Advisory Group LLC is placing both treaties. Owen F. Halstead is the lead broker on both placements and is responsible for ensuring consistent terms across Quorum's reinsurance program.
The key interrelationships between the QS Treaty and the Cat XOL that must be addressed in the drafting process are:
(i) Net-of-QS Attachment. The Cat XOL attaches at $15,000,000 net of QS recoveries. The treaty wordings must be consistent in defining how QS recoveries are calculated and applied in determining the net loss that flows to the Cat XOL layer.
(ii) Per-Occurrence Cap Coordination. The QS Treaty's $25,000,000 per-occurrence cap and the Cat XOL's $15,000,000 attachment point must be coordinated. As discussed in Section III.I, the alignment between these two limits is critical to avoiding gaps or overlaps. The drafting should address scenarios where gross occurrence losses exceed the QS Treaty's per-occurrence cap.
(iii) Occurrence Definition and Hours Clause. The loss corridor calculation under the QS Treaty should address catastrophe losses consistently with the Cat XOL's occurrence definition, including the 168-hour hours clause for windstorm events. If the corridor is modified to exclude catastrophe losses (as recommended in Section VI.C), the definition of "catastrophe loss" for corridor purposes should mirror the occurrence definition under the Cat XOL.
(iv) Panel Coordination. The Cat XOL panel consists of Pinnacle Re (50%), Graystone Reinsurance AG (30%), and Tidewater Re S.A. (20%). Pinnacle Re's dual role as sole reinsurer on the QS Treaty and lead reinsurer on the Cat XOL creates potential coordination efficiencies but also requires careful attention to conflicting interests — for example, Pinnacle Re's interest in maintaining the QS Treaty loss corridor may be influenced by its Cat XOL participation, where it bears 50% of occurrence losses in the $35,000,000 xs $15,000,000 layer.
Blackbridge should ensure that the treaty wording for both placements is circulated simultaneously and that any changes to one treaty's terms that affect the other are flagged and reviewed by both parties' counsel.
VII. Intermediary / Broker Considerations
Blackbridge Advisory Group LLC serves as the reinsurance intermediary and broker of record on both the QS Treaty and the Cat XOL placement. Blackbridge holds New York Department of Financial Services reinsurance intermediary license No. RI-00483. Owen F. Halstead, Managing Director, is the lead broker responsible for the Quorum account.
Blackbridge's brokerage on the QS Treaty is 1.25% of ceded premium. On the projected 2026 ceded premium of $135,200,000, the estimated brokerage cost is $1,690,000 for the QS Treaty year. Brokerage is deducted from ceded premium before remittance to Pinnacle Re and is borne by the reinsurer, not the cedent. As noted, this brokerage rate has been constant since treaty inception and has not been renegotiated.