Citizens 2017 risk transfer program approved, cat bonds to feature

by Artemis on January 5, 2017

The Board of Florida Citizens Property Insurance has approved moving forward on the development of the company’s 2017 risk transfer program for its Coastal Account, and will utilise both the traditional reinsurance and capital markets to secure a diversified and efficient source of risk transfer.

The insurer has budgeted $70 million for its 2017 reinsurance spend, and has estimated that it could secure $754 million of new reinsurance purchases, in addition to the $300 million of Everglades Re II Ltd. (Series 2015-1) capital markets risk transfer carrying over from prior years.

Florida Citizens explains that $2.164 billion of risk transfer is scheduled to mature in 2017, which includes $664 million of traditional protection and the $1.5 billion Everglades Re Ltd. (Series 2014-1) catastrophe bond transaction, the largest deal in the history of the cat bond and insurance-linked securities (ILS) market, as recorded by the Artemis Deal Directory.

The Florida Citizens Board has approved that the insurer replaces a “portion” of its expiring risk transfer program with “a combination of traditional reinsurance and capital markets risk transfer.”

“This will allow Citizens to take advantage of both markets to develop a cost effective and efficient risk transfer program,” explains the firm.

With over $2.1 billion of risk transfer set to mature in 2017 and with the insurer citing that it will replace only a “portion” of the program, highlights the impact the continued depopulation of Florida Citizens is having on its reinsurance needs.

Compared with previous years the volume of both traditional reinsurance and capital markets protection that the company requires for its risk transfer needs has declined, as the depopulation of the insurer continues. So it isn’t too surprising that Florida Citizens isn’t looking for as much reinsurance cover as it has done in previous years.

But for whatever protection is does secure for its 2017 risk transfer program, it’s clear that the company appreciates the diversification and efficiency of the capital markets as well as the traditional reinsurance industry.

“Citizens anticipates placing a portion of its 2017 risk transfer program in the capital markets. Similar to prior years, this risk transfer mechanism will enable Citizens to diversify and expand its sources of risk transfer while minimizing its overall costs of reinsurance,” explains the insurer.

While only an estimate and subject to change, the initial figures provided by the company suggests that capital markets capacity could make up the majority of its 2017 risk transfer program, as has been the case in the past.

$300 million of alternative reinsurance protection from its 2015-1 Everglades Re II issuance, as mentioned earlier, will be included in its 2017 program and, the firm has said that it will utilise the capital markets more, alongside traditional reinsurance, to complete the rest of its program, which could be an additional $743 million.

Combined, this would make its 2017 risk transfer program total $1.054 billion, of which at the very least, and expected to be greater, $300 million is from the capital markets.

In 2015 Florida Citizens transferred $3.905 billion of risk for its Coastal Account, of which $2.050 billion was from the capital markets. For the same account in 2016 the firm had $2.464 billion of risk transfer, and again the capital markets provided the majority of the capacity.

This shows that the insurer has seen its need for reinsurance decline from 2015 to 2016, and again in 2017, unless the finalised 2017 risk transfer program changes dramatically from the most recent proposal and subsequent approval. But also underlines that the company is more than comfortable in using the ILS space to support its risk transfer needs.

Both its traditional reinsurance placement and its capital markets risk transfer program will be brought before the Board of Governors for final approval sometime during the second-quarter of 2017, explains Florida Citizens.

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