Louisiana Citizens passes on cost savings from 2013 reinsurance and cat bond

Demonstrating the value some cedents or sponsors have found in the reinsurance and catastrophe bond market in 2013 due to lower pricing, Louisiana Citizens Property Insurance Corporation, the coastal windstorm insurer of last resort, is passing on savings made to some customers.

Louisiana Citizens is planning to lower its rates for commercial property insurance customers by an average of 4%. That may not seem a lot but in certain areas, predominantly the higher risk coastal areas that it provides insurance, some 352 commercial customers will see their rates decline by an average of nearly 24%.

These rate cuts have only been possible thanks to the more attractive reinsurance environment that LA Citizens found itself faced with at the renewals in 2013. Helped by the pressure that alternative capital has placed on property catastrophe reinsurance renewals, Louisiana Citizens has reduced its reinsurance costs by 20% across the program.

Not only has LA Citizens been able to reduce the cost of its reinsurance protection, it has also increased it with a larger reinsurance buy in 2013 than in previous years. To be able to come out of the renewal season in 2013 with greater protection and able to pass on savings to customers really shows the value cedents can find in the market.

The reduction in costs has been greatly assisted by the saving Louisiana Citizens made on its Pelican Re Ltd. Series 2013-1 cat bond. Pelican Re 2013 was a popular transaction, increasing in size by 40% and the pricing dropping by between 17% and 20%, depending on whether you take the mid-point of the original initial coupon range or the top end.

The excellent value LA Citizens found from this years cat bond issuance is even more clear when you compare it to the 2012 version, Pelican Re Ltd. Series 2012-1.

The 2013 Pelican cat bond features a drop-down, after which the indemnity attachment point moves to $193m of losses to Louisiana Citizens and the investors coupon to 9.25%. The 2012 deal has an attachment point of $200m and pays a coupon of 13.75%. That means the 2013 deal, even after drop-down when it offers its highest coupon, works out around 48% cheaper to Citizens than the 2012 edition.

It’s encouraging to see savings being passed on in this way, thanks to the reduced cost of reinsurance and capital markets covers. When the capital markets first began to get more directly involved in catastrophe reinsurance in the mid-1990’s, one of the benefits was always thought to be the reduced cost-of-capital.

There was always an expectation that capital markets players would be able to take on peak catastrophe risks at a lower cost than some traditional reinsurance markets, which would help risks become better protected against and cost-savings be passed down to the consumer.

2013 has shown that this is possible. If alternative capital continues to grow interest in the reinsurance market we could see more of this as well as more protection being purchased. For a windstorm insurer of last resort to be one of the first to offer customers a saving shows just how dramatic the price declines in the reinsurance market have been this year.