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, which is enough to secure at least $5.5 billion. to transfer risk from traditional reinsurance and capital markets.
Back in March, Citizens set a budget of $725 million for 2023 reinsurance and risk transfer purchases. Yesterday, however, the Board reduced it by $ 50 million to $ 675 million, and it already includes the expenditure of $ 61 million for the Lightning Re industry loss catastrophe bond that it sponsored in March.
So, that means approximately $614 million of the risk transfer budget is available for a mix of traditional reinsurance protection, some bonds that continue to pay coupons, and a potential $775 million of Everglades Re II Ltd. (Series 2023-1 & 2023-2) cat bonds, which are currently in the market.
“We are 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 one we can get the most coverage for best pricing,” said Montero. “Now we are in the capital and traditional markets. We are still collecting quotes and modeling different scenarios to achieve the most effective price and capacity.
In total, Citizens is looking to get somewhere between $5.5 billion and $5.8 billion in reinsurance and risk transfer in the capital markets for its towers for 2023, with a portion already obtained through of multi-year hatch bonds and the Lightning Re transaction.
The Board explained that it expects the total $675 million budget to at least meet the low 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 Lightning Re’s spending fits.
As we previously explained, Citizens plans to merge its Coastal Account, Personal Lines Account and Commercial Lines Account into one Citizens Account, effectively moving its reinsurance structure into one tower. It appears that this has changed the company’s purchasing strategy, with citizens looking for a year or period of wind cover for most of the towers for 2023.
Of course, the reinsurance market has experienced a difficult cycle and for buyers of protection, in particular in Florida, some steep price increases have occurred, which look to continue.
During the meeting, Montero, who is also responsible for reinsurance and risk transfer buying activities for the insurer, gave some comments on the market conditions before the mid-year renewal.
“As per risk transfer pricing expectations for the year, with Florida carriers experiencing rate increases of approximately 30 to 50%. Pricing indicators for non-Florida risk are up to 10 up to 20%,” he said. “The risk transfer market is experiencing a positive momentum, with capital inflows, especially in the capital markets due to the attractive nature of risk transfer pricing that relative to other asset classes in the current market environment.”
So, while clearly still challenging, market conditions seem to be improving somewhat in the State of Florida, although there is an imbalance in supply demand.
“While there is a significant amount of demand for risk transfer capacity for Florida residents, investor demand is strong, but at a slightly higher level of spread than in previous years,” he continued. Montero. “Transactions in the capital market were able to increase the price, at a level slightly below the initial price guide. But the overall level of spread is higher than what we have seen in previous years. This is mainly due to increased credit and risk assessment, increased cost of capital, macro-level stress on financial markets and alternative investment opportunities.
The same is true for reinsurance-on-line rates, with demand outstripping supply from reinsurers as the appetite for property risk in Florida continues to be stagnant.
The budget for the Citizens Coastal Account is $300 million, and the insurer has a target of $2.7 billion in reinsurance and risk transfer for 2023. Of this, $825 million comes from the current cat bond and the Lighting Re deal, with $1.9 billion which is newly purchased limit. .
The budget for the Personal Lines Account is higher than $375 million because this tower requires a $2.92 billion limit to be installed. Again, $825 million came from existing reset cat bonds and Lightning Re, with nearly $2.1 billion in new purchases.
As mentioned by Montero, Florida Citizens is still in the market because it is looking at the end of reinsurance and transfer of risk for 2023, and this includes decisions about the division between the event and aggregate, and by exploring of loss adjustment expenses (LAE).
“We’re also looking at loss adjustment cost capping, that’s a way to reduce rate-on-line costs. It’s a factor like the cat fund. The cat fund pays losses plus 10% factor,” explained Montero. .”
During the meeting, some of the members of the Board expressed concern at the open nature of the meeting, noting that those who are destined to provide their capacity to transfer risk may listen to their strategic placement in public.
After some debate, there were calls for negotiations to continue, then for permission to be sought again from the Board before June 1. But Montero explained why this is dangerous and leaves the insurer open to failing to insure. of the necessary transfer of risk that it requires.
“Traditionally, if they don’t think the board will go, they won’t approve the lines if they don’t have the approval of the Board ahead. That’s why we come to the Board first before we go,” he said. “They think no it will be approved. They don’t want to take the capacity they have and bet it on something 50/50, that’s not going to happen.
He added: “They prefer to put their authorizations somewhere else, where they can get their money back, rather than having it run out at the last minute. They will just write another program in Florida.
“This is important. By June 1st you should be done, your allocations will be done and you will start your contracts. So we are trying to finish this part, so that we can really do everything in the market. “
Montero confirmed that the Citizens “hope to get $5.5 billion with $675 million,” adding that “We have to look at some bells and whistles and maybe, this year, we don’t have everything we want can be had.”
“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 don’t expose everything in an assessment,” he continued.
The Board agreed and signed off on staff to continue cat bond and reinsurance placements, within the $675 million full-year risk transfer budget for 2023.