Florida Citizens board approves Lightning Re cat bond spend

The board of Florida’s Citizens Property Insurance Corporation has approved the spend necessary to proceed with the issuance of its new $400 million to $500 million Lightning Re Ltd. (Series 2023-1) catastrophe bond, the insurers’ first industry-loss triggered deal.

At a board meeting held on Friday afternoon local time, the board of Florida Citizens debated the cost-effectiveness of the spend, with some disagreement as to whether it would be a good use of funds.

But, in the end, a majority of board members approved Florida Citizens staff to continue with the issuance process for the Lightning Re cat bond deal, with those in favour believing it would be a valuable source of multi-year reinsurance protection over the period during which the insurer will be merging its three accounts (Coastal Account, Personal Lines Account and Commercial Lines Account) into a single Citizens Account.

Citizens staff had devised a plan to secure multi-year reinsurance protection that will be relevant across both Account structures, its current multi-account and the future single account, hence the industry-loss triggered Lightning Re catastrophe bond.

At the board meeting on Friday afternoon, which had been postponed from earlier in the week, Citizens staff were looking for board approval to proceed with the industry loss index trigger cat bond placement of between $400 million to $500 million, at a cost not to exceed investment yield plus 11% to 11.5%.

That was a significant upsizing from the initial $200 million target for the Lightning Re cat bond, as we had reported before.

Based on a modelling of Citizens exposure, the board were told that the industry index trigger for the Lightning Re cat bond would roughly equate to an event that resulted in $8 billion of losses to Citizens, or a 1-in-45 year event.

The cost of the Lightning Re cat bond, if it upsizes to the top-end to provide $500 million of protection, could be around $61 million in year-one, the board were told.

Citizens Chairman of the board Carlos Beruff disagreed strongly with the spend, saying, “To me it’s throwing money, you know, in the garbage.”

But Citizens staff explained the utility of locking in this capital markets backed reinsurance now and that if Citizens stepped away from the Lightning Re deal now, having taken it so close to pricing, the insurer could risk losing support from the cat bond market.

Citizens CFO Jennifer Montero explained, “The problem is, we’re in the market now and if we pull out of the market right before pricing, then we’re going to have a hard time going back into that same market and expecting them to get on board again and go through this again. So probably we’d not have the capital market opportunity this year.”

Montero further stated, “We will have the traditional market this year, but there’s no guarantee that we’ll be able to replace that capital markets coverage with traditional markets coverage, and there’s no guarantee that we’re going to get all that we want in the traditional market.”

Montero then highlighted that the Lightning Re cat bond sits around the 1-in-45 year level in the Citizens reinsurance tower, which is right in the middle of the tower and the insurer is supposed to cover itself to the 1-in-100 level.

She further highlighted that if Citizens did not proceed with this Lightning Re cat bond there would be no guarantees the pricing would be any better at a future point in time, or in the traditional market and Citizens needs to buy as much protection as it can up to a roughly $5.8 billion target.

With the Citizens accounts set to merge, the Lightning Re cat bond would be a valuable potentially $500 million source of reinsurance that is already in place over the next three years, giving the insurer a head-start on its reinsurance arrangements when it has a single reinsurance tower to place.

Montero added, “We were able to increase the size, we were able to drive the price down. Right now, we’ve got the investors locked, they’ve they’ve put in their their orders, and it’s ready to be approved so that they can go in and price it.

“If the board does not approve this, that deal is done. It’s off the table and we will not have an opportunity to do another deal like that in the capital markets. We will not be able to do any other kind of deal, this year, we would be turning to just totally 100% the traditional market.”

On voting, the board approved the spend to proceed with securing the Lightning Re cat bond five votes to two, with the Chairman one of those voting against.

So the cat bond can now be priced and orders fixed and filled on completion. We’ll update you on the final pricing and size when we learn what the cat bond was fixed at.

You can read all about the Lightning Re Ltd. (Series 2023-1) industry loss catastrophe bond that is being sponsored by Florida’s Citizens Property Insurance Corporation and view details of more than 900 cat bonds in the extensive Artemis Deal Directory.