Florida Citizens: Capital markets “especially” positive for $5.5bn reinsurance renewal

Florida’s property insurer of last resort, Citizens Property Insurance Corporation, has said that its sees market conditions as especially positive in the capital markets, as it looks to progress its $5.5 billion reinsurance renewal for 2024.

Citizens is expected to buy its largest tower ever, with a total of $5.5 billion of reinsurance limit needed this year.

The insurer has merged its three previous accounts, the Personal Lines Account (PLA), the Commercial Lines Account (CLA), and the Coastal Account, into a single Citizens Account and this is the first time Citizens is coming to the reinsurance market with this consolidated approach to its risk tower and risk transfer needs.

The total $5.5 billion reinsurance purchase will come in two main layers.

First, a sliver layer that sits alongside the FHCF coverage, which will provide approximately $630 million of per-occurrence one-year cover, in excess of at attachment point of $3.5 billion, to cover personal residential and commercial residential losses.

This sliver layer will be placed in the traditional reinsurance market and is designed to work alongside the mandatory coverage provided by the FHCF.

Above that will sit the bulk of Florida Citizens private market risk transfer and reinsurance (roughly $4.9 billion worth), with layer 1 attaching at $9.8 billion and extending to $16.7 billion, with reinsurance, catastrophe bonds and surplus all set to work together in this layer.

The residual market insurer is planning to keep its industry-loss triggered Lightning Re Ltd. (Series 2023-1) catastrophe bond for the coming year, clearly finding it a cost-effective form of reinsurance to continue paying the risk premiums for.

It’s important to note that this is not a new Lightning Re issuance, it’s just the multi-year cat bond rolling forwards and being maintained for another year for Citizens.

In addition to that, Citizens will need roughly $4.4 billion of new reinsurance and risk transfer for this layer.

Florida Citizens intends to procure this from both the traditional and capital markets, so more catastrophe bonds are anticipated.

Both aggregate and occurrence coverage will fill this layer as well, although it’s not clear whether any occurrence cat bonds would be issued, as Citizens has not sponsored a purely occurrence cat bond since 2013, with aggregate named storm cover the most likely structure, we believe.

This layer 1 of around $4.9 billion will provide reinsurance for Florida Citizens personal residential and commercial residential losses.

Now that the structure of the tower is better understood, it’s anticipated Citizens will get indications from markets to help it decide how best to structure the reinsurance within this layer and how much of it could be sourced in catastrophe bond and also collateralized reinsurance form.

Historically, Florida Citizens has always sponsored cat bonds and had a significant component of its traditional reinsurance provided by ILS funds, often in collateralized formats.

We see no reason to expect different in 2024. In fact, it’s anticipated that Florida Citizens could bring a particularly large catastrophe bond to market this year, while we’re also hearing that large lines are anticipated by some of the major ILS market players again.

Citizens staff noted that, “Thus far in 2024, global reinsurance markets, especially capital markets, have a positive outlook with an increase in capacity and demand with rates that projected to remain flat to – 5% depending on the cedent.”

No doubt Florida Citizens will have been watching the cat bond market closely and will be pleased with recent price developments for catastrophe bonds with Florida hurricane exposure.

A year ago, Florida Citizens secured just over $5.38 billion of reinsurance protection, from traditional and ILS markets, for 2023.

This consisted of $2.4 billion of outstanding catastrophe bonds, at the time of the renewal, and a fresh placement of $2.98 billion of traditional and collateralized reinsurance at the June 1st renewal in 2023.

Buying $5 billion of completely new reinsurance for 2024 is a significant increase, remember the Lightning Re bond is still in-force and will roll forwards to provide the other $500 million.