As we wrote back in December, the Board of Florida Citizens approved sponsoring another Everglades Re Ltd. catastrophe bond as part of its 2015 risk transfer program, which will seek around $4.05 billion of reinsurance protection for the insurer.
Citizens Property Insurance Corporation of Florida is already in the reinsurance market looking to secure the best pricing and terms for its 2015 traditional renewal, after which it will visit the capital markets to add the new cat bond layer.
CFO of Florida Citizens Jennifer Montero told Artemis; “We are currently in the traditional market and will look to the capital markets after our traditional placement.”
For 2015, Florida Citizens will roll $1.75 billion of in-force cat bonds (the $1.5 billion Everglades Re Ltd. (Series 2014-1) and the $250m Everglades Re Ltd. (Series 2013-1)) and $202m of multi-year traditional reinsurance into its program, so $1.952 billion of the roughly $4.05 billion is already secured.
Montero said it is too early to speculate as to exactly the mix of the remaining $2 billion or so of risk transfer, whether traditional or collateralized reinsurance or cat bond. Montero said the size of a 2015 catastrophe bond would be driven by the traditional placements success, however there have been a number of reports suggesting a size of $500m has been discussed by brokers.
“As it is too early from our perspective, we only have a placeholder until we complete the traditional placement. However, we do plan to transfer additional risk for the top layer in the capital markets,” Montero explained.
“The capital markets are an integral part of our risk transfer strategy and we plan to explore all options once we have a better understanding of our traditional placement,” Montero continued.
The 2015 risk transfer program will be significantly larger at $4.05 billion than the 2014 program, which was $3.269 billion in size. How much of the difference will end up in the capital markets remains to be seen, but with market conditions looking conducive to achieving even more attractive pricing than in 2014, Citizens could if it wanted to add almost as much as it wanted in terms of cat bonds or collateralized covers.
However, size aside, what really matters is that Florida Citizens wants to show its commitment to becoming better protected, securing as much risk transfer as it can, while also maintaining a diversified panel of counterparties including the capital markets.
That is a strategy that alongside the depopulation program will reduce the potential reliance on assessments on Floridians. Securing risk transfer for a 1-in-100 year hurricane is a huge change compared to Citizens coverage five or more years ago.
In fact, as little as three years ago Citizens would have needed to levy a massive assessment for a 1-in-100 year hurricane.
President, CEO and Executive Director Barry Gilway said during a December board meeting; “Just 3 years ago we had $11.6 billion that would have been assessed in the event of a major storm. As of June, through a combination of reduced exposure and increased risk transfer, taking advantage of highly favorable reinsurance and CAT Bond market conditions, we were down to $1.6 billion and will be well below that number by year end. Current estimates indicate $1 billion by year end.”
Part of the 2015 program will involve the renewal of around $1.519 billion of traditional and collateralized reinsurance protection, as part of the $2 billion sought, which we assume is how the $500m cat bond number has come about. However, Citizens board documents show that the insurer expects cat bond pricing to be “significantly lower” in 2015 than in 2014, so who knows if it will stick to that mix or perhaps even upsize a cat bond if it proves cheaper.
It seems likely that Citizens will maintain a level of diversification between its risk capital sources and counterparties and will want to maintain the support it receives from very large traditional reinsurers.
So with $4.05 billion of risk transfer sought, and $1.75 billion of catastrophe bonds still in-force, it would seem unlikely that another massive cat bond like the $1.5 billion Everglades 2014-1 will be seen.
At the RAA catastrophe modelling conference in Florida today, John Rollins of Florida Citizens suggested that the insurer would buy 50/50 reinsurance and ILS for 2015, which would suggest just a $250m cat bond. We’d imagine that what may transpire is Citizens launching a $250m cat bond for 2015, with the room to upsize it significantly if pricing is advantageous.
If the 2015 risk transfer program is successful in removing the need for assessment for a 1-in-100 year storm completely, largely shifting the risk into the reinsurance and capital markets, it will be remarkable progress in just three years.
Florida Citizens provides a really good example of private market capacity enabling state-backed insurance initiatives to be downsized and to reduce their risk, something other similar insurers can learn from.