Florida Citizens plans Everglades Re 2015 catastrophe bond

The Board of Citizens Property Insurance Corporation of Florida has approved the use of its Everglades Re Ltd. vehicle for another catastrophe bond issuance in 2015, as the insurer looks to secure reinsurance and risk transfer to cover a 1-in-100 year hurricane.

Florida Citizens has been undertaking a strategy of de-risking, through its depopulation program and clearinghouse allowing it to shed policies to the private insurance market, while also buying more reinsurance and capital markets risk transfer than ever before in its history.

This has resulted in Citizens reducing the policy count that it manages as well as its actual exposure to storms hitting the Florida coastline. Risk capital from third-party investors, through the sponsoring of catastrophe bonds and the use of other collateralized reinsurance covers, has been a major contributing factor to the improved financial shape that Citizens now finds itself in.

Citizens now believes that it will be able to handle a 1-in-100 year hurricane in 2015 without the need to call on taxpayers for assessments. Core to this ability to withstand what is a very severe hurricane event, is the use of reinsurance and capital markets risk transfer.

Citizens said it will expect to enter the 2015 hurricane season in June next year with this ability to manage a once in a century hurricane event. Just three years ago such an event could have resulted in an $11.6 billion assessment on taxpayers, but now it is expected to have sufficient surplus and reinsurance coverage to protect its customer base, which has fallen from a high of nearly 1.5 million in 2012 to 727,000 and is likely to drop further in 2015.

President, CEO and Executive Director Barry Gilway commented; “Thanks to the hard work of dedicated Citizens employees and a steadily improving private market, we are on the verge of eliminating, in the event of the 1-in-100 year storm, the need for the dreaded ‘hurricane tax’ that has hung over heads of Floridians for far too long. This is incredibly good news for Citizens policyholders and all Floridians who have been on the hook.”

Central to the improved financial status of Citizens is the attractive conditions in the global reinsurance and capital markets, that have allowed it to secure ever greater amounts of risk transfer and traditional reinsurance at increasingly more attractive pricing.

On the 9th of December the Board of Citizens approved a recommendation for Citizens to purchase sufficient risk transfer to enable it to handle this 1-in-100 year hurricane scenario. With some of its coverage expiring before the start of the 2015 storm season that will require Citizens to return to the reinsurance market to buy more cover and it is also looking to the capital markets to help once again.

For 2015, the Board approved a recommendation to renew its expiring reinsurance coverage with a combination of reinsurance and capital markets risk transfer, up to a level to protect against the 1-in-100 year storm.

A traditional reinsurance risk transfer program will be proposed in late April or early May 2015, while Citizens anticipates placing a portion of its reinsurance program in the capital markets using another catastrophe bond issue through Everglades Re. A proposal for capital markets risk transfer through the Everglades Re SPI and a catastrophe bond will also be brought before the Citizens board by May of 2015.

Citizens believes it can reduce or eliminate entirely the need for assessment for a 1-in-100 year storm as a result of its next visit to the reinsurance and capital markets. The Board of Governors of Florida Citizens approved the plan, so it looks almost guaranteed that another Everglades cat bond will be issued in 2015.

With the capital markets and insurance-linked investors remaining keen to support new catastrophe bond issues and reinsurance rate softening set to continue, the market conditions that Florida Citizens finds in the second quarter of 2015 may be equally as conducive, or even better, than it found in 2014.

That could allow Citizens to increase the risk transfer it receives from the catastrophe bond market again and result in another large issuance, if the insurer so chooses. One things for certain, with cat bonds definitely on the Citizens agenda for 2015 investors will be looking out for the next deal and perhaps hoping it covers a higher layer of risk, making a higher coupon a likelihood.