Florida’s Citizens Readies $1.5 Billion Catastrophe Bond Deal

By Michael Adams | April 28, 2014

Florida’s largest property insurer is preparing to transfer $3.1 billion in risk through a combination of reinsurance catastrophe bonds, including a $1.5 billion deal that is the largest of its kind on record.

The Citizens Property Insurance Corp. board of governors last week approved the plan that officials say will protect taxpayers from paying large assessments in the event of a hurricane.

In the 2014 storm season, if Citizens suffers the effects of a one-in-100 year storm, policyholders would face assessments totaling $2.4 billion. In the event of up to a one-in-70 year storm, Citizens would have enough funds to pay all claims without needing assessments.

That represents a significant decrease from the $11.9 billion assessment burden calculated in 2012.

“Essentially, in the last three years, we have reduced the risk to our taxpayers of an assessment by more than $9 billion or 80 percent,” said Chairman Chris Gardner.

Citizens risk transfer program calls for a two-prong approach that includes purchasing traditional reinsurance and issuing catastrophic bonds.

The insurer is benefiting from a reduction in reinsurance costs and a growing interest by investors in catastrophic bonds.

“We’ve been able to capitalize on favorable market conditions across the board to maximize our 2014 risk transfer program,” said Chief Financial Officer Jennifer Montero. “Such market conditions have allowed us to exceed our initial expectations in regard to the level of reinsurance coverage at the most efficient pricing.”

Citizens is planning to transfer $1.5 billion in risk through the Bermuda-based Everglades Re Ltd., a company set up to solely serve as a conduit to issue Citizens bonds. The $1.5 billion comes on top of the $250 million in bonds issued in 2013.

Unlike the 2013 catastrophic bond deal, the 2014 deal will be on an aggregate basis over the next three years, providing Citizens with coverage in the event of multiple smaller storms.

The 2014 catastrophic bond issuance is the largest in history. As a measure of investors’ interest, Citizens expects the bonds will go with a rate on line of 7.5 percent, which is less than half of the 17.75 rate attached to the previous bond deal.

Citizens is also planning to purchase $1.3 billion in traditional reinsurance, which includes $750 million can be used to cover multiple storms.

Supporting the risk transfer program is $348 million in Florida Hurricane Catastrophe Fund monies and a projected Citizens surplus of $600 million.

Members of the Safe Florida Coalition, which includes Associated Industries of Florida, Florida Wildlife Federation and the R Street Institute, expressed their support for Citizens plans.

“The Citizens board deserves credit for taking advantage of historically low global reinsurance rates to transfer some of its enormous hurricane risk to the private market,” said Christian Camara, R Street Institute Florida state director.

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