Florida Citizens buys 68% more reinsurance for 2014 at less cost

In all the excitement surrounding Florida’s Citizens Property Insurance Corporation’s record $1.5 billion catastrophe bond transaction, Everglades Re Ltd. (Series 2014-1), we didn’t cover the entire Citizens reinsurance program placement in detail.

We did however discuss the amazing value for money that Florida Citizens found in the reinsurance market in 2014 on the social network Twitter on Friday, before Citizens had even sent out its own press release.

For those of our readers not yet on Twitter, Artemis has nearly 1,300 followers on the social network, it can often be the source of breaking news these days so maybe you should consider joining. Twitter is fast becoming a preferred news feed service for many of our growing audience of readers.

The tweets are repeated below and followed by more detail from Citizens on its 2014 reinsurance renewal program.

Amazing fact: Florida Citizens has likely upped its #reinsurance cover by over $1 billion for 2014 for slightly less spend than in 2013!

— Artemis.bm (@artemisbm) April 24, 2014

That was based on Everglades Re 2014 sticking at $1.25b. Now at $1.5b the cost-benefits to @citizens_fla likely even greater #reinsurance

— Artemis.bm (@artemisbm) April 24, 2014

Also, when thinking about savings Florida Citizens made you also need to factor in that more of #reinsurance program is aggregate now.

— Artemis.bm (@artemisbm) April 24, 2014

So @citizens_fla will have almost 68% more #reinsurance protection, some aggregate instead of occurrence, for 2014 for ~same cost as 2013!

— Artemis.bm (@artemisbm) April 24, 2014

Total $3.1B of #reinsurance for @citizens_fla for 2014. $1.5B from latest #catbond, $250m from earlier 2013 cat bond, $1.3B traditional

— Artemis.bm (@artemisbm) April 24, 2014

$3.1B of #reinsurance cost @citizens_fla $300m in 2014. $1.85B cost @citizens_fla $304m in 2013! Overall rate-on-line down to ~10%

— Artemis.bm (@artemisbm) April 24, 2014

Florida Citizens has had an amazing result in the reinsurance market in 2014. Not only has it successfully issued the largest single catastrophe bond issuance on record, the $1.5 billion Everglades Re 2014-1, it has also increased the amount of traditional reinsurance cover it purchases.

In total for 2014 Florida Citizens now has $3.1 billion of reinsurance protection from the private markets, some traditional reinsurance and some from alternative reinsurance capital providers and capital market investors through the Everglades Re cat bonds.

Citizens said that the run-up to its 2014 reinsurance renewal saw it engaged in weeks of negotiations as it received strong global demand from markets seeking to participate in its reinsurance program. This is quite a turn around from previous years, where Citizens was not seen as the most desirable reinsurance cedent to do business with.

The last few years, with Citizens renewed focus on expanding its risk transfer, improving the provision of data to reinsurance markets and its desire to be a better cedent, have clearly paid dividends, with both the traditional and non-traditional reinsurance markets now willing to support this huge risk transfer increase for the insurer.

For 2014 Citizens has increased its reinsurance protection by 68% over 2013. At the same time as growing the overall level of protection Citizens has managed to secure this larger amount of cover on largely aggregate terms and at a slightly lower cost than it paid for risk transfer in 2013.

The 2013 program saw Citizens secure $1.85 billion of risk transfer at a cost of $304m. In 2014, the $3.1 billion of risk transfer has cost Citizens $300m, so securing it 68% more protection at a lower cost.

“This is incredible progress and the result of a lot of hard work,” said Chris Gardner, Chairman of Citizens Board of Governors. “Essentially, in the last three years, we have reduced the risk to our taxpayers of an assessment by more than $9 billion, or approximately 80 percent.”

The 2014 reinsurance program includes two catastrophe bonds totalling $1.75 billion of capital markets protection; Citizens 2013 deal the $250m Everglades Re Ltd. (Series 2013-1) and its latest $1.5 billion Everglades Re Ltd. (Series 2014-1).

The 2012 and 2013 Everglades Re cat bonds both provided per-occurrence protection to Citizens, but the new Everglades Re 2014 is an annual aggregate cat bond, providing Citizens with protection against multiple smaller storms, as well as one big event, over a three-year period.

The ability to switch protection to an aggregate basis in the cat bond market is something we’ve seen a number of sponsors do in 2014, taking advantage of investors appetite for new cat bond deals to secure broader and more all-encompassing protection.

Citizens has also grown its participation in the private reinsurance market with a $1.3 billion purchase of coverage for the 2014 hurricane season, including $750m of aggregate protection.

This chart, below, from a Citizens presentation just prior to the completion of the Everglades Re 2014 cat bond shows the way Florida Citizens has dramatically increased its private market reinsurance and risk transfer in recent years. It also shows the dramatic way that pricing on the program has declined, as markets have become more familiar with Citizens and more willing to support its reinsurance needs.

Pricing and amount of protection bought by Florida Citizens in its reinsurance program over time

In terms of pricing, Florida Citizens has paid approximately a 10% rate-on-line for its reinsurance protection for 2014, a significant drop from the 16% or more paid in 2013. The 2013 figure above does not include the $250m final upsizing of the Everglades Re cat bond.

In 2012 Citizens paid a 17.75% rate-on-line for its first Everglades cat bond. That dropped in 2013 to a rate-on-line of around 11.5% but for the 2014 cat bond came right down to 7.5% for the much broader cover of an aggregate protection and the much larger amount of coverage secured.

Chief Financial Officer Jennifer Montero commented on the reinsurance market conditions Citizens has benefited from; “We’ve been able to capitalize on favorable market conditions across the board to maximize our 2014 risk transfer program. Such market conditions have allowed us to exceed our initial expectations in regard to the level of reinsurance coverage at the most efficient pricing.”

Perhaps the biggest headline for Citizens is its new-found ability to pay all claims for a 1 in 70 year hurricane without the need to assess policyholders. That is a significant improvement on its claims paying ability of recent years and puts the whole state of Florida in a stronger position as the 2014 hurricane season approaches.

The reinsurance and capital markets have supported Citizens risk transfer needs at a low-level of pricing that it may never witness again. At least now it has locked in the $1.5 billion of catastrophe bond coverage for a three-year period, which will help it to maintain these greater risk transfer levels over the two years to come even if reinsurance rates should rise.

Whether Citizens could maintain this high level of risk transfer beyond the maturity of the Everglades Re 2014-1 cat bond will depend on where rates are headed. If we experience some damaging U.S. hurricanes rates will certainly move north increasing the cost of protection for Citizens in years to come.

That makes it even more important to secure as much cover as possible when buying conditions are as conducive as we see currently, here the Citizens team have been very savvy. In years to come, as it continues to depopulate policies and push more risk into the private insurance market, Citizens may not require as much reinsurance protection as we’ve seen it buy in 2014. That may help it to maintain a greater level of risk transfer even if rates do increase, but perhaps not as much as it has in place for 2014.

Here’s a useful graphic taken from a Citizens presentation which shows an illustrative aggregate reinsurance tower for Citizens coastal account. It’s useful as it shows where the catastrophe bond and traditional reinsurance layers sit within the program, although the numbers are outdated and from before the Everglades cat bond was finalised and the reinsurance layers were fully placed.

Illustrative example of Florida Citizens 2014 reinsurance program tower for the coastal account