The board of governors of Florida’s Citizens Property Insurance Corporation has approved the purchase of $1.33 billion of reinsurance coverage in its upcoming 2017 renewal, with a combination of traditional reinsurance and capital markets coverage provided by the Everglades Re II Ltd. (Series 2017-1) catastrophe bond deal.
This is the smallest reinsurance program renewal from Florida Citizens for some years, reflecting the successful downsizing of its risk through the depopulation program which has passed on a significant proportion of hurricane exposed Florida property insurance risk to the private re/insurance market.
As a result, Florida Citizens has successfully reduced the potential hit to taxpayers when the next major hurricane occurs, but the insurer still needs reinsurance protection so as to minimise any potential for taxpayer impact or assessments, even with the smaller portfolio of risks.
Just a year ago, Florida Citizens reinsurance program was providing almost double the protection, at $2.464 billion of coverage for the year. That included its in-force catastrophe bonds, including the record $1.5 billion Everglades Re 2014 deal. This year, before the renewal happens, all of Citizens existing cat bonds will have matured or been called, meaning the currently marketed Everglades Re II 2017 is the only cat bond cover it will benefit from this wind season.
The board of Florida Citizens approved the finance team to buy $1.33 billion of reinsurance this year, structured in three layers, the second of which includes the latest Everglades Re II cat bond, with the spend on this coverage capped at $94 billion.
The reinsurance and risk transfer for 2017 is all for the Citizens coastal account portfolio, which is where the catastrophe bonds have always been focused.
Florida Citizens explained its risk transfer strategy; “Citizens’ strategy for 2017 is to transfer risk alongside and above coverage provided by the FHCF, transfer commercial non-residential (CNR) risk, and transfer aggregate annual risk in order to protect a portion of surplus for most catastrophic events and thereby further reducing the amount and likelihood of assessments beyond the 1-100 year event to the citizens of Florida. This in turn also provides for additional claims paying resources in the event that multiple hurricanes strike Florida. Citizens’ private reinsurance programs are structured to also provide liquidity to Citizens by allowing Citizens to obtain reinsurance recoveries in advance of the payment of claims after a triggering event.”
As ever, the capital markets will play a role. Citizens has transferred $2.8 billion of risk to the capital markets using catastrophe bonds since 2012, although 2017 may be the year when it actually has some of the least cat bond cover in years.
This year, the Citizens risk transfer team expects “To obtain improved terms based upon market conditions and the continued evolution of the capital markets risk transfer space,” the insurer said.
Citizens also said that “The Everglades Re II transaction represents an important continuation of the risk transfer strategy for Citizens,” offering counterparty diversification, lower counterparty risk and fixed cost multi-year protection.
The Citizens board passed the motion that staff of the insurer pursue the purchase of $1.33 billion of risk transfer, using traditional reinsurance and the capital markets through the new Everglades Re II cat bond, with the cost not to exceed $94 million.
Layer 1 of the program will be traditional and provide $350 million of coverage, working in tandem with the Florida Hurricane Catastrophe Fund (FHCF) protection. Layers 2 is $880 million of coverage, annual aggregate in nature and multi-year, made up of traditional and capital markets capacity, and this is where the cat bond will sit. Layer 3 will provide $100 million of per-occurrence protection for losses not covered by the other layers and for where there is no FHCF coverage.
The cat bond sits in layer 2 alongside traditional aggregate reinsurance coverage, but so far the size of each has not been fully defined. The Everglades Re II bond is still preliminarily sized at $250 million (Update: Shortly after this article was published a source told us the cat bond has upsized to $300m), but Citizens is known to test the appetite of both traditional reinsurance and capital markets before deciding on how much capacity to procure from each source.
As the diagram of the approved 2017 risk transfer program shows below, if the cat bond pricing is more attractive compared to the traditional market it could elect to upsize the Everglades deal to fill more of that layer. The $880 million layer could be made up of much more cat bond coverage if the ILS investor market is particularly keen on the risk.
Alternatively, should the traditional reinsurance market be particularly competitive on price we could see just the $250 million Everglades Re II cat bond issued, which would take Citizens into the hurricane season with the least catastrophe bond coverage it has had since it entered the market in 2012.
The downsizing of Florida Citizens risk in recent years is quite an achievement.
While some may enjoy pointing out how much reinsurance can cost, when claims are not made every year, the fact this reinsurance and capital market risk transfer is in place could be absolutely key to protecting tax payers should any major storm approach the Florida coastline in 2017 and the cat bond market plays an important part of this.
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