Florida Citizens targets $3.64bn 2022 risk transfer buy, for $4.7bn program

For 2022, the staff of Florida’s Citizens Property Insurance Corporation are seeking approval to buy roughly $3.64 billion of new risk transfer, across traditional reinsurance and catastrophe bonds, which added to still in-force cat bonds from prior years will take the Citizens program to roughly $4.7 billion for the coming hurricane season.

Later today, the Board of Florida Citizens will vote on whether to approve the reinsurance buy, which appears to be higher than anticipated.

Read the latest updates on budget, the state of the market and pricing from Citizens point of view in our follow-up here.

As we explained before, it looked like Florida Citizens would seek to purchase at least $2.653 billion of new reinsurance or catastrophe bond backed risk transfer in 2022, perhaps as much as $3.428 billion.

With Florida Citizens policy count growing rapidly, fuelled by Floridian property insurance carrier failures and their shedding or cancellations of policies, it seems Citizens needs to shore up its protection even more, in order to cover the 1-in-100 year hurricane that it always targets coverage for.

The proposal documents going in front of Florida Citizens Board today, state that the property insurer of last resort for the state of Florida will look to buy $1.869 billion of risk transfer limit from the reinsurance and capital markets for the Coastal Account and $2.828 billion of limit, again from traditional and ILS market sources, for the Personal Lines Account for 2022.

Some of this is already in-force, thanks to Citizens use of the catastrophe bond market through its Everglades Re special purpose vehicles over the years.

For the Coastal Account, there are $625 million of catastrophe bonds still in-force providing multi-year reinsurance protection from the capital markets, but all other layers require renewing, so to hit the proposed tower size that means Florida Citizens needs to buy $1.244 billion of new protection at this renewal.

All of that $1.244 billion of Coastal Account risk transfer Citizens is procuring this year is coming from the traditional reinsurance market, it seems. So we shouldn’t expect an additional cat bond for the Coastal Account at this time.

On the Personal Lines Account side, where Citizens exposure has risen again, there is $435 million of in-force protection from existing Everglades catastrophe bonds, meaning new risk transfer to the tune of $2.393 billion will be purchased at the renewals this year.

Of that new purchase, we know of the still being marketed Everglades Re II Ltd. (Series 2022-1) catastrophe bond that is currently sized at $200 million.

That new cat bond will share a $1.225 billion layer with traditional reinsurance, so at the moment it appears the traditional market may take the lions share.

Aside from the capital markets share of that $1.225 billion layer through the new Everglades Re II cat bond issuance, the rest of the $2.393 billion of risk transfer will be procured from the traditional reinsurance market, Citizens staffs proposal documents suggest.

Which means that, out of the almost $3.64 billion of new risk transfer being purchased for 2022 by Florida Citizens, as little as $200 million may go to cat bond investors, which could be a reflection of the spread widening seen in that marketplace.

Of course, we expect major ILS fund managers will take a significant share of Florida Citizens traditional reinsurance layers, as has been seen in recent renewal rounds for the insurer.

While purchasing more risk transfer than anticipated, the budget does not look set to be broken.

The staff suggest that they can procure all of these reinsurance and risk transfer needs within the budget placeholder for 2022 risk transfer costs of $400 million, which as we explained before was almost 60% up on the estimated spend for this year.

Of course, it’s also important to note that residual markets like Citizens buying more protection are also sucking capacity out of the market in peak peril zones, that in some cases is not being replaced by fresh capital coming into reinsurance or cat bonds and ILS.

That means even more pressure for prices and upwards trajectory for rates, which may exacerbate some of the reinsurance renewal challenges that smaller buyers face this year.

It’s assumed the Citizens Board will approve these purchases, at up to the budgeted $400 million risk transfer spend, as it actually looks like the insurer will benefit from more coverage than it had originally thought possible within that pricing.

Update: During the Board meeting, Citizens staff disclosed that due to rising rates in reinsurance and cat bond markets, the $400 million budget may now only cover roughly 90% of the needed risk transfer.

During the commentary, Citizens staff said the catastrophe bond market has “plummeted” in recent weeks, while the whole risk transfer market is said to be in disarray, reducing availability of capacity.

The $400 million budget is expected to cover roughly $4.25 billion of their program needs therefore, while filling 100% of the program is estimated to cost closer to $433 million. Read more in our follow-up here.

Also read:

Florida Citizens new Everglades cat bond sized up to $200m as price rises.

Policy growth means more cat bonds & reinsurance for Florida Citizens.

Florida Citizens seeks higher rate increases at upcoming hearing.

Florida Citizens targets “the best deal we can get” on risk transfer: Montero.

Florida Citizens debates buying from zero to $3.4bn of risk transfer.

Florida Citizens staff call on Board to publicly support risk transfer.

Florida Citizens reinsurance & cat bond budget hiked ~60% for 2022.