Citizens plans for higher risk transfer renewal costs in 2020

Florida’s Citizens Property Insurance Corporation has increased its budget for catastrophe bond and reinsurance risk transfer spend for the 2020 wind season, with part of this increase set to support the higher rates seen in the Florida market.

The risk transfer and reinsurance budget requested at a Board meeting yesterday was for a maximum spend of $145 million.

In 2019 Citizens actually spent $97.7 million on its placement, $76.1 million for the Coastal Account tower and $18.8 million for the Personal Lines Account.

Some of this increase has been requested as the insurer realises that rates are rising for Florida reinsurance coverage in advance of the June 1st renewals.

But, it’s also important to note that Florida Citizens is buying more fresh protection this year than it did a year ago.

For the 2020 hurricane season Florida Citizens is securing a $1.4 billion reinsurance tower for its Coastal Account, with the insurers new Everglades Re II Ltd. (Series 2020-1 & 2020-2) catastrophe bond set to play a key role in the tower.

As we reported yesterday, the rates-on-line for the catastrophe bond, in terms of coupon, have risen significantly during the marketing of the transaction, with an average increase of 20% from the mid-point of initial guidance across the two tranches of notes being issued.

Florida Citizens was targeting a $300 million cat bond issuance and this continues to be its goal, although should traditional reinsurance prove cheaper we could see the size adjusted perhaps, or conversely if the reinsurance market proves more expensive the cat bond could potentially increase in size.

Of the $1.4 billion of Coastal Account risk transfer, around $1 billion is being purchased at this renewals, with the new Everglades Re II cat bond set to contribute $200 million based on the initial target.

For Florida Citizens Personal Lines Account another $300 million is being secured, with the Everglades Re II cat bond contributing $100 million, based on the targeted issuance size.

The insurer did note though that placements would be, “split between the traditional and capital markets, based on market conditions,” suggesting if pricing is too high on either side of the market the amounts could change.

Interestingly though, the Everglades Re II Series 2020-2 Class A tranche of notes that targets $100 million of reinsurance protection for Citizens personal lines account tower, could be the more likely to grow.

As Citizens says that this layer actually has a total target size of $125 million and is all to be sourced from the capital markets through this tranche of notes.

So for 2020, Florida Citizens aims to buy approximately $1.3 billion of fresh risk transfer from the reinsurance and catastrophe bond markets for a maximum cost of $145 million.

Which compares to the insurer buying $703 million in 2019 using a budget of $110 million.

Last year there was more coverage to buy in the higher layers than lower down in the tower, where as this year Citizens has a little more cover to buy at higher expected loss levels, which alongside the higher limits being purchased and the general increase and firming in Florida reinsurance rates, will be a driver of the cost increase.

While reinsurance rates are clearly firming in Florida, they are not moving rapidly enough for some.

As we also explained yesterday, some ILS fund underwriters have put down their pens on the Florida renewals, in reaction to the pricing and terms being offered.

Despite any increase in costs, Florida Citizens highlights the importance of its its risk transfer program, saying, “participation in the reinsurance markets delivers a dollar- for-dollar reduction of potential assessments that result from losses reducing or exhausting Citizens’ surplus and FHCF coverage.”