Florida’s Citizens Property Insurance Corporation’s Board met yesterday to debate the carrier’s reinsurance risk transfer plans, approving a lower-than-expected budget of $675 million, which Chief Financial Officer (CFO), Jennifer Montero, hopes will be enough to secure at least $5.5 billion of risk transfer from both the traditional reinsurance and capital markets.
Back in March, Citizens set a budget of $725 million for its 2023 reinsurance and risk transfer purchase. Yesterday, however, the Board reduced this by $50 million to $675 million, and this already includes its spend of $61 million for the Lightning Re industry loss catastrophe bond that it sponsored in March.
So, that means that approximately $614 million of the risk transfer budget is available for a mix of traditional reinsurance protection, other cat bonds continued coupon payments, and its potentially $775 million Everglades Re II Ltd. (Series 2023-1 & 2023-2) cat bond, which is currently out in the market.
“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,” said Montero. “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.”
All in all, Citizens is looking to secure somewhere between $5.5 billion and $5.8 billion of reinsurance and capital markets risk transfer for its towers for 2023, with a portion of that already secured via multi-year cat bonds and the Lightning Re transaction.
The Board explained that it’s expected that the overall $675 million budget will at least secure the lower-end of that target, although there was some confusion during the meeting as to exactly what the budget was for, why it was cut by $50 million, and how the spend on Lightning Re fits.
As we explained previously, Citizens plans to merge its Coastal Account, Personal Lines Account and Commercial Lines Account into a single Citizens Account, effectively transitioning its reinsurance structure into a single tower. It appears as though this has altered the firm’s buying strategy, with Citizens seeking one-year or wind season covers across most of the towers for 2023.
Of course, the reinsurance market is experiencing a hard cycle and for buyers of protection, in Florida in particular, some steep price rises have taken place, which looks set to continue.
During the meeting, Montero, who is also responsible for the reinsurance and risk transfer buying activities for the insurer, provided some commentary on market conditions ahead of the mid-year renewals.
“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%,” she stated. “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.”
So, while clearly still challenging, market conditions appear to improving somewhat in the State of Florida, although there is still a supply demand imbalance.
“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,” continued Montero. “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 is also true for reinsurance rates-on-line, with demand still outpacing supply from reinsurers as appetite for Florida property risk continues to be muted.
The budget for Citizens Coastal Account is $300 million, and the insurer has a target of $2.7 billion of reinsurance and risk transfer for 2023. Of this, $825 million is from existing cat bonds and the Lighting Re deal, with $1.9 billion being newly purchased limit.
The budget for the Personal Lines Account is higher at $375 million as this tower requires $2.92 billion of limit to be in place. Again, $825 million is from existing reset cat bonds and Lightning Re, with almost $2.1 billion being newly purchased.
As mentioned by Montero, Florida Citizens is still in the market as it looks to finalise its reinsurance and risk transfer for 2023, and this includes decisions around the split between occurrence and aggregate, and by exploring loss adjustment expenses (LAE).
“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,” explained Montero. “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.”
During the meeting, some of the Board members expressed concern over the open nature of the meeting, noting that those set to provide their risk transfer capacity could be listening to them strategise their placement in public.
Following some debate, there were calls for negotiations to continue, then for approval to be sought again from the Board just prior to June 1st. But Montero explained why this could be risky and leave the insurer open to failing to secure the necessary risk transfer it needs.
“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,” she said. “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.”
Adding: “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.
“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 confirmed that Citizens “hope to get $5.5 billion with the $675 million,” adding that “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,” she continued.
The Board agreed and signed off for staff to proceed with both the cat bond and reinsurance placements, within the $675 million full-year risk transfer budget for 2023.
