More peak Florida wind risk hits the private market in another Citizens takeout

Florida’s Citizens Property Insurance completed another takeout deal last week as part of its ongoing efforts to depopulate itself of certain policies to reduce its exposure to hurricanes and improve its financial state. The takeout deal approved on Wednesday will lower the insurer’s potential exposure by $16 billion and cut losses by $439 million in the event of a 1-in-100 year storm.

Florida Citizens is actively de-risking itself by offloading policies to new start-up insurers. We saw the first of these transactions back in February with the transfer of 31,000 wind only insurance customers from its coastal account to private insurance firm Weston Insurance Co.

The latest takeout agreement will see Florida-based Heritage Property and Casualty Insurance Co. take responsibility for approximately 60,000 multiperil policies from Citizens’ Personal Lines and Coastal Accounts. Around 40% of the policies included in the takeout come from Broward, Palm Beach and Miami-Dade counties, a region that has experienced higher than average losses historically.

The terms of the deal state that Citizens will pay Heritage approximately $52 million for taking over the policies and paying claims going back to January 1. Heritage has already assumed more than 54,000 policies under a separate agreement with Citizens approved last year. Heritage has to offer policyholders comparable coverage to Citizens and has to follow Citizens rate increase guidelines, no more than 10% per year, and will hold the policies for at least three years.

As well as reducing the potential exposure that Citizens has to policy losses by $16 billion and reducing its maximum losses from a 1-in-100 year storm by $439m this deal also reduces Citizens premium to the Florida Hurricane Catastrophe Fund by $10 million.

“This is a great opportunity to place another 60,000 policies into the hands of one of the most well capitalized companies in the Florida marketplace,” commented Citizens President and CEO Barry Gilway. “I think the logic behind this agreement is compelling.”

The upshot of this is that more of the highest risk Florida hurricane exposed insurance policies have moved into the hands of a private insurance company which will have its own need for reinsurance protection. With Florida property catastrophe rates tumbling, thanks largely to the pressure that third-party capital and insurance-linked securities are applying on rates in the region, it’s a good time for a firm such as Heritage to be needing an increased level of reinsurance protection.

With more smaller privately marketed catastrophe bonds being transacted in Florida recently, Sunshine Re Ltd. (Series 2013-1) a prime example, there is a chance that some of this risk that Citizens has offloaded will find its way into the ILS market in the future. As Citizens depopulates, and many of its most risky policies move into the private insurance market, it will bring a steady pipeline of new business to the reinsurance sector.

The Heritage takeout has seen some controversy however, as some of the Citizens board apparently did not agree with paying Heritage the $52m of surplus. That surplus payment will be structured like a backdated quota-share reinsurance agreement, covering any losses on the policies in 2013 up to the 28th June. The controversy surrounds the fact that other takeouts have taken place without any payment such as this and some board members questioned whether a precedent was being set.

Controversial as this deal is, the Florida reinsurance, collateralized reinsurance and catastrophe bond markets all stand to benefit from this depopulation and it also provides opportunities to some of the recently established sidecar vehicles which may be looking to deploy capacity in the upcoming renewals. The overall picture of risk transfer in Florida looks more healthy as well, with less of the risk being pushed into the Florida Hurricane Catastrophe Fund and more of it being available to the private reinsurance markets where claims paying ability is more certain.