Florida’s Citizens Property Insurance Approves ‘Largest Catastrophe Bond in History’

Apr 24, 2014


At its meeting this morning, April 24, 2014, Florida’s Citizens Property Insurance Corporation’s (“Citizens”) Board of Governors (“Board”) approved what Chairman Chris Gardner termed the “largest catastrophe bond in the history of the world.”

Citizens, which has $250 million of risk transfer remaining from its 2013 multi-year risk transfer program, has already planned to transfer additional exposure in the amount of $2.634 billion to global reinsurance and capital markets in 2014, a strategy intended to transfer risk alongside and above coverage provided by the Florida Hurricane Catastrophe Fund.  The transaction will also transfer commercial non-residential risk, along with aggregate annual risk in order to retain at least a portion of Citizens’ surplus for most catastrophic events, thereby reducing the potential of assessments on Florida insurance policyholders.  It also will provide for additional reinsurance and claims-paying resources in the event that multiple hurricanes strike Florida.  Meanwhile, Citizens’ private reinsurance programs have been structured to provide functional liquidity to Citizens by allowing it to obtain reinsurance recoveries in advance of the payment of claims after a triggering event. 

Citizens has been a participant in the reinsurance markets in prior years, and has on several occasions used a collateralized structure to mitigate counterparty risk.  Fiscal year 2012 marked the first time that Citizens used the capital markets for a portion of its risk transfer program.  In 2012, Citizens executed a $750 million multi-year, collateralized reinsurance placement in the capital markets with Everglades Re that provided coverage of catastrophic risk for both residential and commercial losses (commercial non-residential losses are not covered).  In 2013, Citizens executed a similar placement with Everglades Re that transferred $250 million of additional risk.  These placements not only provided an overall reduction in the pricing of Citizens’ 2012 and 2013 reinsurance programs, but also enabled Citizens to expand the diversity of reinsurance sources and reach new market participants. 

In light of continued market interest and capacity, available pricing, and a concerted effort to further reduce Citizens’ existing exposure, the State-run insurer has planned for additional coverage through Everglades Re in 2014.  This capital markets transaction includes terms and conditions similar to the 2012 and 2013 transactions, with some exceptions for which Citizens was able to obtain improved terms based upon market conditions and the continued evolution of the capital markets risk transfer space. 

One significant change from the earlier transactions is an ultimate net loss provision that allows for aggregate coverage instead of single occurrence coverage, as was the case with the 2012 and 2013 transactions.  Aggregate coverage is expected to protect Citizens’ surplus and reduce its reliance on assessments. 

The Everglades Re transaction was described as unique from traditional reinsurance because the proceeds of the collateral account that secure the reinsurance contract will be funded by the issuance of capital markets instruments specifically for that purpose. While Citizens is not the issuer of these catastrophe bonds (the issuer is Everglades Re Ltd.), Citizens helped structure the issuance and supported the transaction. 

The Everglades Re contract will be augmented by traditional reinsurance, which was also approved by the Board this morning.  The augmentation provided by the traditional reinsurance will likewise provide aggregate coverage for losses from personal residential and commercial residential policies.  However, this is only for Citizens’ Coastal Account. 

According to Citizens, the primary benefits of the capital markets segment of the 2014 risk transfer program include the following: 

  • Diversification to Citizens’ risk transfer counterparties by introducing new participants and continuation of the previous year’s participants to Citizens’ program;
  • The reduction of counterparty risk through full collateralization; 
  • The placement of downward pressure on traditional reinsurance pricing by demonstrating that Citizens has alternative sources of risk transfer; 
  • Collateralized multi-year protection at a fixed cost; thus improving Citizens’ financial posture in years following hurricane events. ‘

The Board also approved the purchase of mandated Florida Hurricane Catastrophe Fund coverage from the FHCF, a cost that was included in Citizens 2014 budget.

To view today’s Board meeting materials, click here.


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