73% of Florida Citizens 2013 private reinsurance program is collateralized

As we wrote recently here, Florida’s Citizens Property Insurance Corporation has entered the 2013 Atlantic Hurricane Season in the best financial shape of its history, thanks largely to the increased amount of private risk transfer it now has in place due to catastrophe bonds and cheaper reinsurance purchases, due to catastrophe reinsurance rate decreases.

Having now fully completed its 2013 reinsurance program at the recent June 1 renewals, Florida Citizens 2013 reinsurance program is a great example of how the catastrophe reinsurance market, particularly for Florida wind cover, has changed.

The 2013 reinsurance program has seen a greatly increased level of participation from fully-collateralized sources of reinsurance cover, which we suspect has been driven by two factors. Firstly the greater availability of collateralized reinsurance capacity, driven by strong inflows and growing investor interest in the sector, and secondly the fact that these collateralized sources of reinsurance capacity can now often be cheaper than traditional cover due to lower costs of capital.

The Everglades Re catastrophe bond program is a massive contributor to the collateralized reinsurance capacity that Florida Citizens now has in place. The Everglades Re Ltd. (Series 2012-1) was a massive $750m of cover while the Everglades Re Ltd. (Series 2013-1) added another $250m, bringing the amount of catastrophe bond cover Citizens benefits from to $1 billion.

Pricing has been kind to Florida Citizens in 2013, with all of its cover coming in cheaper than in previous years, clearly demonstrating the steep decline in catastrophe reinsurance rates this year. Citizens said that its 2013 cat bond deal 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 in 2013 are said to have saved as much as 30% on a risk adjusted basis compared to its reinsurance purchases in 2012.

So not only has Citizens enlarged the amount of private risk transfer it benefits from, largely assisted by fully-collateralized sources of capacity, but it has also saved considerable money on a dollar to dollar comparison basis.

In total, Florida Citizens has $1.851 billion of private reinsurance cover in place for 2013, with another Florida Hurricane Catastrophe Fund mandatory layer of $3.036 billion of protection.

Of the $1.851 billion, just over 73% of that private reinsurance protection comes from fully-collateralized sources in 2013, a big increase from 2012. It’s quite amazing to think that a state backed property insurer of last-resort such as Citizens is now using alternative course of reinsurance capital for the majority of its reinsurance program, a real sign of the times.

If you take out the $1 billion of catastrophe bonds, Florida Citizens has $854m of private single and multi-year reinsurance in force for 2013. Of this reinsurance protection, not from cat bonds, 42% is from fully-collateralized players with the remainder from rated, traditional reinsurance firms. So collateralized reinsurance cover is a growing part of this non-securitized portion of Citizens cover too.

In the 2013 reinsurance program, Citizens took greatly increased lines of coverage from some collateralized reinsurers, such as hedge fund backed reinsurer DE Shaw who jumped from 7% of Citizens 2012 reinsurance program to 16.5% of the 2013 program with a line size of just under $100m. Nephila Capital jumped from 8.5% of the 2012 program to nearly 15% of the 2013 reinsurance with a line size of just under $90m.

Other collateralized players involved in the 2013 reinsurance program include Aeolus Re with just under $20m contributing about 3.3% of the program, Validus’ Alpha Cat with $25m or 4.14% and Hannover Re, via Juniperus (now Pillar Capital) more than doubling its involvement to just over $18m or 3% of the program.

This is a clear demonstration of the growing importance and influence of collateralized sources of reinsurance capacity, with the overall program dominated by collateralized protection and even the non-cat bond program heading towards being 50/50.

It will be interesting to see whether Florida Citizens continues to turn to collateralized capacity in renewal seasons to come. If pricing remains attractive we wouldn’t be surprised to see the collateralized reinsurance market win even more of its business, but conversely if traditional reinsurance proves more cost-effective we’d expect it to turn its focus more in that direction. Florida Citizens has been a great example of the growing influence that catastrophe bonds and collateralized reinsurance providers are having on the broader market.