Citizens puts in place $3.9B risk transfer for 2015, cat bonds dominate

Citizens has lined itself up with the best protection in its history for 2015, with a risk transfer, reinsurance and catastrophe bond programme that eliminates the need for Florida policyholder assessments right up to a 1 in 100 year storm.

For the first time Florida Citizens has more catastrophe bond protection sourced than traditional reinsurance in 2015, as board members approved a programme featuring $1.855 billion in traditional reinsurance and $2.05 billion in capital market catastrophe bonds.

The overall $3.9 billion of risk transfer coverage is now almost 53% cat bonds and 47% traditional reinsurance, a quite stunning change when the programme was 100% traditional pre-2012. However it should be noted that the risk transfer programme was significantly smaller then as well, so the capital markets have clearly helped Citizens become better protected.

The $2.05 billion of cat bonds in-force for the 2015 season include the just completed $300m Everglades Re II Ltd. (Series 2015-1) catastrophe bond, the 2014 $1.5 billion Everglades Re Ltd. (Series 2014-1) and the 2013 $250m Everglades Re Ltd. (Series 2013-1).

In fact, the capital market and third-party capital contribution to Florida Citizens risk transfer programme is likely even larger, as the reinsurance component no doubt includes some fully collateralized participants behind the scenes.

The enlarged risk transfer programme for 2015 will enable Citizens to meet the demands of a 1-in-100 year storm without the need to level assessments on Florida policyholders, a goal that the insurer had been seeking to achieve this year.

For 2015 Citizens has increased its overall purchase by $636.5m, from the $3.269 billion in reinsurance protections secured for the 2014 hurricane season. The 2015 risk transfer purchase also includes an additional $300m in capital market coverage that can be tapped to pay losses following a named storm, thanks to the Everglades Re II Ltd. (Series 2015-1) catastrophe bond.

“Eliminating the risk of assessments on Citizens customers and Florida policyholders has been the top priority for Citizens over the past several years and I’m happy to announce that we have reached that goal,” Gardner said. “As the private market continues to strengthen, Citizens gets closer and closer to returning to its traditional role as the state’s residual carrier.”

The fact the Citizens has managed to reach $2.05 billion of in-force catastrophe bonds, for the 2015 season, in just three years since its first deal came to market in 2012, is testament to the value that the capital markets have brought to insurers seeking risk transfer.

The fact that cat bonds make up more than half of the risk transfer programme is also telling, demonstrating the importance that insurers place on diversification among their reinsurance counterparties.

Since 2012, Florida Citizens has embraced the capital markets as providers of risk transfer wholeheartedly, to the benefit of Florida residents and its policyholders. Should a storm hit the state this year, Citizens is perhaps better prepared than it has ever been, thanks to the contribution made by catastrophe bond investors and reinsurers.

The capital markets in particular has helped Citizens to transfer key risks from its Coastal Account to others better able to bear the risks, removing the risk that a major storm causes assessments on tax payers.

The structure of Citizens 2015 risk transfer programme for its Coastal Account, including catastrophe bond and reinsurance layers, can be seen in the diagram below.

Florida Citizens 2015 risk transfer programme for the Coastal Account