Florida Citizens budgets $725m for additional $4.2bn risk transfer for 2023

Citizens Property Insurance Corporation of Florida, the not-for-profit provider of property insurance to those unable to get private market coverage, is planning a significant spend to secure a further $4.2 billion of reinsurance and risk transfer in advance of this years hurricane season.

As we’d reported before, Florida Citizens has secured a $500 million industry loss trigger catastrophe bond, the Lightning Re Ltd. (Series 2023-1) issuance, which provides a chunk of the total coverage the insurer requires for this year.

Things are a little more complicated by the fact Citizens is set to merge its three accounts (Coastal Account, Personal Lines Account and Commercial Lines Account) into a single Citizens Account, effectively transitioning its reinsurance structure from three towers into a single one for future years.

That makes its reinsurance purchasing a little more complex in 2023, as any multi-year solutions will need to be flexible enough to adapt to the new single reinsurance tower structure going forwards.

Hence, the Lightning Re industry loss cat bond, as it will be as effective without any changes to a single tower, or three, as it would trigger based on PCS reported Florida named storm losses.

The move to merge accounts does make the form of any reinsurance buying less obvious, as terms will need to be flexible for any indemnity catastrophe bonds Citizens chooses to sponsor before hurricane season this year. However, the cat bond reset feature could potentially be something Citizens could leverage, or even a one-year deal, and as we reported before, a new indemnity cat bond is something the insurer would like to sponsor this year.

Looking ahead to its reinsurance renewals this year, which are typically secured in May, Florida Citizens staff said that most Florida carriers are expected to see rate increases of around 30% to 50%, while other regions of the US are expected to be up 10% to 20%.

As a result, Citizens is expecting to need to budget for a significant risk transfer spend in 2023.

However, the Citizens staff noted that there is “some positive momentum” and that capital inflows are being seen “due to the attractive nature of risk transfer pricing and uncorrelated risk relative to other asset classes in the current market environment,” which is clearly hinting at the prospects for the catastrophe bond market.

However, there is significant demand for reinsurance and risk transfer, especially in Florida, while sector capital levels and investor demand remains relatively stable overall, driving spreads higher than in previous years, the Citizens staff state.

While recent cat bonds have upsized and priced down, “overall spread levels are above what has been seen in prior years due to the increased scrutiny on credit and risk, increasing cost of capital, macro‐level stress in the financial markets, and alternative investment opportunities,” the staff explain.

All of which makes for a likely challenging market environment, where there are no guarantees Citizens will secure its full target for reinsurance and risk transfer, within the budget it has set itself.

In total, the risk transfer program across the Coastal and Personal Line Accounts is targeted to be just over $5.8 billion, including $1.15 billion of multi-year protection from catastrophe bonds that will roll into the new coverage year and now the $500 million Lightning Re cat bond as well.

What this all means, is that Florida Citizens will go to market with a target to secure a further $4.2 billion of reinsurance and cat bond risk transfer before June 1st.

In terms of new private market reinsurance and risk transfer, Citizens will target purchasing $2.055 billion for its Coastal Account and $2.124 billion for the Personal Lines Account.

The total budget for these purchases are seen as $325 million for the Coastal Account and $400 million for the Personal Lines Account, so a total budget for $725 million of additional premiums to be spent to secure the desired risk transfer for 2023.

Interestingly, Florida Citizens has apportioned, on an estimated basis, $210 million of the Lightning Re industry-loss cat bond to its Coastal Account and $270 million of the new cat bond coverage to its Personal Lines Account.

Which of course leaves $20 million of the Lightning Re cat bond that presumably is now being apportioned, on an estimated basis, to provide coverage to the Commercial Lines Account, becoming the only private market risk transfer to benefit that tower.

The staff of Florida Citizens will now work with its service providers and the market to gather options to be evaluated, with respect to the structure, pricing and terms of reinsurance and capital markets risk transfer it may enter into for 2023.

The Board will be presented with options in May, for final approval to be given.