The Board of Florida’s Citizens Property Insurance Corporation approved a slightly smaller budget for its reinsurance and capital market risk transfer purchases than expected yesterday, but market conditions are improved somewhat it seems and, while pricing is higher, the insurer of last resort is seeing positive momentum, especially with catastrophe bonds.
Having previously set a $725 million budget for 2023 reinsurance and risk transfer purchases, the Board yesterday reduced that to $675 million, which already includes a $61 million spend for the Lightning Re industry loss catastrophe bond that Citizens sponsored back in March.
With a plan for later this year to merge its three accounts (Coastal Account, Personal Lines Account and Commercial Lines Account) into a single Citizens Account, effectively transitioning its reinsurance structure from three towers into a single one for future years, it has made Florida Citizens reinsurance buying a little less-typical, with one-year or wind season covers sought across most of the towers for 2023.
Case in point the new Everglades Re II Ltd. (Series 2023-1 & 2023-2) dual series catastrophe bond issuance, which is currently in the market to provide a single wind season of protection and as we reported earlier today, looks set to upsize to as much as $775 million in terms of the transaction size.
During yesterdays Florida Citizens Board meeting, Jennifer Montero, CFO and leader of the reinsurance and risk transfer buying activities for the insurer, gave an overview of the renewal market conditions that are being faced at this time.
She explained, “As expected risk transfer pricing is up for the year, with Florida carriers experiencing rate increases of approximately 30 to 50%. Pricing indications for non-Florida risk is up 10 to 20%.”
But added that conditions are improving, saying, “The risk transfer market has experienced some positive momentum, with capital inflows, especially in the capital markets due to the attractive nature of risk transfer pricing relative to other asset classes in the current market environment.”
However, demand for reinsurance in Florida remains high, while investor demand and flows are still not significantly responding to that, it seems, so pricing of risk transfer and cat bond spreads remain elevated.
Montero went on to say, “While there is a significant amount of demand for risk transfer capacity for Florida cedents, investor demand has been stable, but at slightly higher spread levels than in prior years.
“Capital markets transactions have been able to upsize in price, at levels slightly below the initial price guidance. But overall spread levels are above what we’ve seen in prior years.
“This is primarily due to the increased scrutiny on credit and risk, increased costs of capital, macro-level stress in the financial markets and alternative investment opportunities.”
This reads across to reinsurance rates-on-line as well, with similar dynamics of high levels of demand, while capacity and appetite on the reinsurer side has not increased too significantly so far.
Of course, Everest Re’s announcement of a $1.5bn equity capital raise yesterday could signal things are changing there.
Florida Citizens is looking to secure between $5.5 billion and $5.8 billion of reinsurance and capital markets risk transfer for its towers this year, with some of that already secured in the form of multi-year catastrophe bonds and the aforementioned industry-loss trigger cat bond Lightning Re.
Overall, the $675 million budget is expected to at least secure the lower-end of that target, Citizens staff said during yesterday’s Board meeting, although there was a good deal of confusion over what exactly the budget was for 2023, why it had been reduced from the previously defined $725 million, and also where the spend on Lightning Re sat in relation to it.
The upshot was that the $675 million figure was the 2023 reinsurance and risk transfer budget, to include the $61 million spend on Lightning Re, meaning roughly $614 million available for the traditional reinsurance, other cat bonds continued coupon payments, and the new potentially $775 million Everglades catastrophe bond issuance.
The Citizens Coastal account has a target set for $2.7 billion of reinsurance and risk transfer for 2023, $825 million of which will be from existing cat bonds that get reset and the Lightning Re deal, while $1.9 billion of it will be newly purchased.
The budget for the Coastal account is set at $300 million.
Florida Citizens Personal Lines Account requires $2.92 billion of limit to be in place, of which again $825 million will be from existing reset cat bonds and the Lightning Re deal, while almost $2.1 billion will be newly purchased.
The Personal Lines Account budget for risk transfer is therefore higher at $375 million.
The new Everglades Re II catastrophe bonds upsizing significantly could take a little pressure off the rest of the reinsurance buy, by locking in this coverage ahead of time as the notes are set to be priced later today, we understand.
The work to secure the new cat bond and the traditional reinsurance continues at Florida Citizens, with decisions over the split between occurrence and aggregate one way it can seek to control some of the costs.
Another way is by looking at loss adjustment expenses (LAE), on which Montero explained, “We’re also looking at capping of the loss adjustment expense, that is another way to reduce the cost of the rate-on-line. It’s a factor like the cat fund. The cat fund pays losses plus a 10% factor.
“We’re looking at the cost-benefit of putting those factors in place on our overall programme to drive some of the pricing down and we would still hopefully try to stay within that 10% cost.”
This appears to be a reaction to the fact Citizens staff believe that the legislative reforms to the Florida property insurance market will reduce loss adjustment costs and result in reduced loss amplification, so as a result they feel a lower LAE factor would be appropriate at this renewal.
They did note that reinsurance providers are still waiting for evidence that the legislative reforms really do work, so whether the LAE factor reduction could be achieved continues to be uncertain. But they felt positive this was a lever they could attempt to pull.
With Florida Citizens simultaneously placing its new catastrophe bond and the traditional reinsurance in time for the June 1 renewal, the insurer is using both to achieve some price efficiency, it seems.
CFO Montero said, “We’re still in the market and the 2023 capital markets cat bond, Everglades Re, is in the same layer as the traditional. So that allows us to leverage the two against each other, see which ones we can get the most coverage for at the best pricing.
“We are currently in both the capital and traditional markets. We’re still collecting quotes and modelling different scenarios to achieve the most effective pricing and capacity.”
Finally, some Board members expressed concern over the open nature of yesterday’s Board meeting and the fact those set to provide their risk transfer capacity could be listening to them strategise their placement in public.
Chairman of the Florida Citizens Board, Carlos Beruff, said, “What I find interesting is, here we are in a business where the people that provide services to us we can’t divulge any of the proprietary information that they give us. But yet, we have to provide all our information to them. I don’t understand the lack of the yin and yang on that issue.
“But maybe that’s for our next legislative season. We’ll have to see if we can carve out for negotiating reinsurance every year, strictly a carve out for that provision, because this is the worst way of negotiating that I have ever seen.”
By a carve out, Beruff means a way for the Board to meet as a group and discuss the reinsurance renewals in private, instead of having to make every group Board meeting a public broadcast.
Shortly after some more discussion, there was a call for negotiations to continue on the reinsurance and risk transfer, then for approval to be sought again from the Board just prior to June 1st.
CFO Montero explained that this approach would be risky and leave Citizens open to failing to secure the necessary risk transfer it wants, with the soon to price Everglades Re II catastrophe bonds particularly at risk of failing to be placed.
“On the cat bond side, we are pricing right after, in the next couple of days. Right after the approval from the board, we’re supposed to close on the bonds on May 22nd,” Montero explained.
Adding, “So those two bond deals would fall apart if we don’t get the approval about that time.”
Moving on to how the reinsurance market might view that approach and saying, “As far as the traditional, if they don’t think that the board’s going to, they won’t authorise the lines if they don’t have the Board’s approval upfront. That’s why we come to the Board first before we go.
“They will think that it could not be approved. They don’t want to take the capacity that they have and bet it on something that is a 50/50, that might not happen.
“They’d rather put their authorisations somewhere else, where they’re going to get return on their money, rather than having it fall apart at the last minute. They’ll just write another Florida programme.”
She continued to explain to the Board, “It’s crucial. By June 1 you should be done, done your allocations and you’re starting on your contracts. That’s why we try to get this part done, so we can actually nail everything down in the market.”
Montero said the plan was that after approval was received at the meeting she and her team would move to get the new Everglades Re II catastrophe bonds priced and then proceed to model out scenarios for the traditional reinsurance, based on how the cat bonds fit with the tower, on the occurrence versus aggregate coverage split, and issues such as the LAE factor, towards finalising the firm order terms (FOTs) for the towers.
“We hope to get $5.5 billion with the $675m,” Montero said. “We do have to look at some bells and whistles and maybe, this year, we don’t have everything we want to have.
“But we have coverage and I think that’s the most important thing, is to have a decent amount of coverage so that if we get hit, we’re not exposing everything to an assessment.”
The Board concurred and signed off for Florida Citizens staff to proceed with the catastrophe bond and reinsurance placements, within the $675 million full-year risk transfer budget.
The commentary from the Citizens Board meeting is always enlightening and it echoes the experience of many in the catastrophe bond market, that some softening of pricing has occurred and investor appetites are high.
Meanwhile, in traditional reinsurance, Citizens looks likely to secure a far larger reinsurance tower than it managed in 2022, when it paid roughly 20% more in risk adjusted rate-on-line, but only secured a far smaller placement as it shied away from reinsurance prices and terms.
Pricing is up again in 2023, but Citizens has continued to expand its policy count rapidly and its exposure levels are higher.
Meaning the insurer is keen to be better protected this year, it seems, with the target for protection far higher, and just its new cat bonds sponsored in 2023 set to be larger than its entire traditional reinsurance placement a year ago.
With reports that major players such as Berkshire Hathaway are looking to take significant lines from the Citizens program this year, it’s possible the pricing is more conducive than anticipated and this, alongside the momentum seen in the capital markets, has helped to increase the Florida-based insurer of last resorts appetite for protection in 2023.
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