Reinsurance and cat bonds help Florida Citizens into best financial shape ever

Florida’s Citizens Property Insurance Corporation will begin the 2013 Hurricane Season in the best financial shape ever, according to recent comments made by CEO Barry Gilway. The CEO, of the insurer of last resort for many of Florida’s most hurricane exposed properties, cites the contribution that private reinsurance alongside the issuance of catastrophe bonds have made to its finances.

Citizens has been running the risk of having a major shortfall in financing should a severe hurricane season impact Florida for a number of years now. Floridians have been haunted by the threat of potential emergency assessments which they may have been subjected to should losses exceed Citizens level of claims paying ability.

Just over a year ago Florida Citizens was said to have as much as $7.2 billion of unfunded liability which could have led to shortfalls after major hurricanes, particularly if more than one storm hit Florida in a single season. This would have led the insurer to levy assessments and also look to issue bonds to finance its own recovery after a hefty storm toll.

Now, thanks to the use of private reinsurance markets, alongside capital market and institutional investors, for its recent risk transfer purchases, as well as depopulation efforts, Citizens finds itself in the best financial shape it has ever been in. CEO Gilway told the Florida Sun Sentinal in a recent interview that Citizens has reduced the potential shortfall by more than $3 billion in just over one year. It’s estimated that this equates to the potential assessment load on Floridians having been reduced by as much as 43%.

Gilway cites the more than $1.75 billion worth of reinsurance and catastrophe bond coverage that the insurer has secured in the last year. Also helping to reduce its potential liabilities is the depopulation of policies, where Citizens policies are being returned to the private market such as through its deal with Weston and its recent arrangement with Heritage, which have contributed to a reduction of its policy count by over 300,000 in just over a year.

Gilway estimates that another 250,000 policies are sitting with Citizens but shouldn’t be as they are already market-priced. Citizens is already being approached by companies seeking to take these on and the creation of a clearing house in the future, which was approved as part of SB 1770 and signed into law by the Florida governor recently, will help that process and further reduce Citizens policy load.

Citizens now has more than $1.75 billion worth of private risk transfer, through traditional reinsurance, collateralized reinsurance and catastrophe bond transactions. Catastrophe bonds make up the largest share of this, with Everglades Re 2012 accounting for $750m of protection, Everglades Re 2013 added another $250m this year and then $750m+ of traditional and fully-collateralized reinsurance protection takes it to the largest amount of private market risk transfer that Citizens has ever had at one time.

We understand that as much as 40% of the $750m reinsurance placement may come from collateralized markets, meaning that Citizens has more fully-collateralized reinsurance than traditional reinsurance. Cost savings due to the impact that third-party capital has had on the reinsurance markets is another factor here. Citizens said that the 2013 cat bond notes came in at a final cost to the insurer of 11.08%, a 40% saving over the 2012 transaction which cost the insurer 19.07% all-in. At the same time its reinsurance purchases this year are said to have saved as much as 30% on a risk adjusted basis compared to its reinsurance purchases in 2012.

That’s very strong evidence of the impact that collateralized and third-party backed reinsurance capacity is having in Florida. If the mid-year renewals see strong price decreases for those using collateralized capacity perhaps we could see the figure of 30% participation from the alternative reinsurance capital markets on certain lines and locations.

The example set by Florida Citizens reinsurance and catastrophe bond contracts over the last 12 months really shows the impact that the convergence of reinsurance and capital markets has had on pricing and availability of risk transfer in the state.

Thanks to the influx of third-party capital into reinsurance, and the ever increasing appetite of investors to support cat bond deals, Florida Citizens is now in the best financial shape it has ever been in, just in time for the start of the 2013 hurricane season on the 1st June.