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Irrational pricing drove Florida Citizens to pull cat bond layer: CFO Montero


Florida’s Citizens Property Insurance Corporation withdrew one layer of its latest issuance from the catastrophe bond market at the mid-year renewal, as it found that capital market investors are looking for “irrational returns” and wasn’t willing to lock in pricing over a multi-year basis at those rates, CFO Jennifer Montero explained to us.

Florida Citizens logoAs we explained yesterday, Florida Citizens pulled the largest $200 million tranche of notes from its Everglades Re II Ltd. (Series 2020-1 & 2020-2) catastrophe bond issuance, leaving just a $100 million tranche offered to investors.

The now-pulled $200 million layer, which was destined to cover a chunk of Citizens Coastal Account reinsurance tower, had seen a 20% increase in pricing guidance during its marketing to catastrophe bond investors.

The pricing was just too high for Citizens to want to lock-in the coverage on a multi-year basis, its CFO explained to us, resulting in a shift back to the traditional reinsurance market where the insurer will look to place as much of the layer as it can on a single-year basis.

CFO Jennifer Montero told us that, “Based on current market conditions as a result of COVID-19, Citizens has decided not to place the Series 2020-1 capital markets risk transfer for the Coastal Account. The capital markets are currently disjointed, fragmented and expecting irrational returns.

“Given current market conditions, the expected return on capital required by investors and reinsurers are significantly higher due to COVID-19. This is not just in the reinsurance markets, but also in the Investment Grade corporate debt markets where the spreads have widened by over 100 bps or from 93 basis points to 208 basis points.

“Based on the current dislocation in the capital markets and irrational price increases, Citizens decided not to chase the market and lock in the currently elevated rates on a multi-year basis.”

Of course, the elevated return expectations of the capital market investors supporting catastrophe bond issuance go hand in hand with a firming (perhaps hardening) Florida reinsurance renewal marketplace, that is seeing average increases of 20% or higher year-on-year.

In some cases those renewal rate increases are even higher, depending on cedent performance and risks in the portfolio, making for a challenging renewal for many and some to downsize their towers, rather than increase their reinsurance coverage.

With Florida Citizens the states insurer of last resort, it always tries to secure its risk transfer program at appropriate pricing. This year the pricing on offer in both the reinsurance and catastrophe bond markets is seen as too high and as a result the insurer doesn’t want commit to multi-year deals.

“The Series 2020-1 capital markets risk transfer was part of a $900 million layer above its FHCF coverage, which includes $400 million of risk transfer that has rolled over from prior years and will expire after the 2020 season. Citizens’ goal is to place as much as possible of the remaining $500 million of the $900 million layer in the traditional reinsurance market on a single year basis,” Montero explained.

Adding, “We’re looking for more stability in the financial markets by the end of 2020. A single year placement this year will give Citizens additional flexibility to structure its layer above the FHCF coverage for the 2021 season.

“Citizens’ projected risk transfer program is very strong and is projected to protect approximately 65% in Citizens’ Coastal Account in a 1-100 year event.”

It seems likely Florida Citizens will be back to the catastrophe bond market in years to come and ILS funds are almost certain to participate in any single-year, traditional reinsurance placement for its Coastal Account tower in 2020 anyway.

While cat bond funds may be a little disappointed at the move, given their support shown for the Citizens risk transfer program over the years. At least they may get the chance to write a slice of its Personal Lines Account tower for the first time, with the remaining $100 million tranche of the Everglades Re II catastrophe bond still slated for issue.

We’ll keep you updated as Florida Citizens new Everglades Re II Ltd. (Series 2020-1 & 2020-2) catastrophe bond comes to market and you can read about every cat bond Citizens has ever sponsored in the Artemis Deal Directory.

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