Florida’s Citizens Property Insurance Corporation, the property insurer of last resort for the Florida market, has returned to the capital markets for a new, multi-year industry loss catastrophe bond transaction, as it prepares to merge its three accounts.
The special legislative session in December 2022 saw the passing of Senate Bill 2-A, which authorises Citizens to combine its coastal account, personal lines account, and commercial lines account into a single Citizens account.
According to meeting materials for the cancelled March 15th, 2023, Board of Governors Meeting, a key benefit of the merger would be that the surplus previously separated would be combined, in turn enhancing the insurer’s ability to pay claims for future storms and minimise the potential for assessments.
At this time, Citizens’ intention is to make this transition no earlier than January of next year, meaning the accounts will continue to be separated for the 2023 storm season.
In light of this, “Citizens has pursued an option that would provide multi-year coverage that is not directly tied to the losses of an individual Citizens account,” reads the meeting material.
The outcome is Lightning Re Ltd. (Series 2023-1), the insurer’s tenth full 144a catastrophe bond, but first to utilise an industry loss trigger to provide coverage, with Citizens opting for indemnity reinsurance through its Everglades Re structure in the past.
Florida’s property market remains extremely challenging, and while reforms have been enacted in an effort to stabilise the marketplace and make it more sustainable in the future, numerous domestic carriers have failed in recent years, which has seen Citizens’ exposure rise fairly rapidly.
With this in mind, the industry loss trigger makes sense as it provides the company with an alternative source of protection that can closely approximate its exposure to any major Florida named storm or hurricane event.
Lightning Re, the new special purpose vehicle (SPV), features Class A notes which range in size from $400 million to $500 million, attaching at $51.5 billion and exhausting at $66 billion of total Florida personal and commercial insured residential losses. Price guidance is equal to investment yield plus 11% to 11.5%.
This cat bond provides Citizens with three years of collateralised excess of loss reinsurance protection on an annual aggregate basis, covering both personal and commercial residential losses across all three accounts. The bond leverages an industry loss index trigger based on PCS published insured residential losses in Florida for Florida named storms.
Of course, Citizens also purchases traditional reinsurance, and has a number of catastrophe bonds that remain in-force for the upcoming storm season, so this new industry loss deal is just one part of the residual insurer’s risk transfer strategy. The second part, the traditional placement and the indemnity trigger cat bonds, are scheduled to come before the board for approval at the early May reinsurance board meeting.
However, the meeting materials for the cancelled March 15th meeting include a draft 2023 risk transfer programme, which shows the amount of coverage Citizens could be in the market for to satisfy its reinsurance renewal needs.
Across the three accounts, as remember that the single account does not come into force this year, Citizens will need to procure a little more than $5.8 billion of reinsurance protection for the 2023 storm season.
However, there will be $1.15 billion of Everglades Re cat bonds still in-force, meaning that, including Lightning Re, Citizens will need to buy a bit more than $4.6 billion of protection prior to June.
The meeting material suggests that this will be acquired from both the traditional reinsurance market and the capital markets, meaning Citizens could be set to issue another catastrophe bond in the second quarter of 2023.
Of course, the March 15th meeting, during which the board was going to be asked to approve the new Lightning Re cat bond issuance, was cancelled, so it’s currently unclear whether this was approved or not.