Florida Citizens made significant saving by using catastrophe bond market

We always knew that Florida’s Citizens Property Insurance had found issuing the Everglades Re Ltd. catastrophe bond more cost effective than securing the same amount of cover in the traditional reinsurance market, but we were never able to put a figure to the actual savings. Now Citizens senior management team have discussed a figure at a media briefing held on Friday.

The media briefing, held via a conference call, was primarily to discuss their mitigation inspection program, but they also discussed the state backed insurers spend on their reinsurance cover. This discussion involved Citizens having to justify their travel expenses to London and Bermuda where they met with reinsurers who participate in their risk transfer program. Overall Citizens said that their travel expenses helped to facilitate $50m of savings for their reinsurance plan.

On the $750m Everglades Re Ltd. catastrophe bond, Carlos A. Lacasa, Chairman of the Board of Governors of Citizens and Barry Gilway, the new CEO of Citizens, said that they had worked out that Citizens had saved as much as $18m by securing the $750m of cover through a cat bond rather than in the traditional reinsurance markets.

Even if that saving is worked out over the two-year period that the cover runs for it is still impressive. The fact that Citizens could secure such a large amount of capacity from the capital markets for one of the worlds peak risk zones is impressive enough. The fact that the cover came in so much cheaper than the traditional reinsurance markets is even more impressive and is testament to the maturity of the cat bond space and its investors willingness to accept risk.

On the size of the cat bond, which grew during marketing from $200m to the $750m which was eventually issued, CEO Barry Gilway commented on his surprise at the success of the placement given market conditions saying, “I was shocked they were able to accomplish that”.

Sharon Binnun, CFO of Citizens is quoted in an article in Bloomberg as saying; “We absolutely did not know that we would have the opportunity to upsize this thing three times. In the interest-rate environment that we’re in now, investors are looking for another vehicle through which to park at least a portion of their investment portfolios.”

So Citizens are clearly pleased with the value they found in the catastrophe bond market and are also pleased with the amount of capacity the market was happy to provide for their reinsurance program. They see their 2012 reinsurance program as game-changing for the Florida market and observers who have been calling for Citizens to transfer more risk will be in agreement.

It will be interesting to see how Citizens approach their next reinsurance renewal and whether they decide to try to push further capacity into the cat bond market over traditional reinsurance. It would make sense for them to issue another cat bond, if pricing and market conditions are conducive, as they certainly need the capacity and by staggering their cat bonds maturity dates they may find the cover even more beneficial to their overall risk transfer needs.