Florida Citizens board approves work towards next catastrophe bond

by Artemis on February 18, 2013

As we wrote last Friday in this article on the subject, Florida’s Citizens Property Insurance plans to increase its spending on private market reinsurance and risk transfer in 2013, upping the amount of cover it will look to acquire by almost 17%. It has been expected that Citizens would look to the capital markets again after the success of its first cat bond last year. Now that has been confirmed as Citizens CFO told us that work towards a capital market solution has been approved.

Florida Citizens plans to increase the reinsurance cover it purchases by another $250m to $1.75 billion for the 2013 underwriting year. At a board meeting held last Thursday it was decided that the 2013 budget for reinsurance and risk transfer premiums and charges would be upped to $327m for the year, with the aim of securing $1.75 billion of limit.

Currently Citizens has $750m of cover from the catastrophe bond market, after its first Everglades Re cat bond upsized to become the largest single tranche of cat bond risk issued last year. It appreciated the value that the capital markets offered, citing savings of as much as $18m by opting to place the Everglades Re cat bond, compared to using the traditional reinsurance market for that layer of risk.

It stands to reason that the insurer would look to the capital markets again in 2013, particularly if rates are attractive, which recent cat bonds have shown continues to be the case.

We caught up with Citizens CFO Sharon Binnun to find out whether any progress had been made in the insurers investigations into options for its 2013 reinsurance and risk transfer program. Binnun told us that at the same meeting on Thursday the Board of Governers of Florida Citizens approved its staff to work towards a capital markets risk transfer for the coastal account, the area of its portfolio containing the most hurricane exposed coastal properties. Binnun has been tasked with bringing back to the Board the details of the amount of risk to be transferred and the cost of any deal, for which she will seek approval at the next meeting.

So as long as the market is receptive, which we expect it to be, and the cost is not prohibitive it looks like Citizens will be issuing another catastrophe bond by the middle of the year. It’s expected that this will be issued under the Everglades Re Ltd. SPV, likely as a series 2013-1 tranche of notes. Size wise, Citizens previously said it may look for another $250m of cat bond cover, but that could grow, or shrink depending on the cost and appetite of investors. If Citizens finds an opportunity to lock in a three-year cat bond at a significantly cheaper rate than traditional reinsurance it would seem prudent to take advantage of that and upsize its next deal too.

As we said in our article on Friday, we could see Citizens in a situation later this year where it has more reinsurance protection from collateralized or capital market sources than it does from traditional reinsurers. This would be a fairly landmark occurrence as we don’t currently know of any other large reinsurance program which utilises convergence sources of cover more than traditional.

Read our article from Friday; Florida Citizens to up its private reinsurance and risk transfer spend in 2013.

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