Florida Citizens CFO says risk transfer markets in “disarray”

The CFO of Florida’s Citizens Property Insurance Corporation said today that the reinsurance risk transfer markets are in “disarray”, meaning the insurer won’t be able to buy its targeted program within budget with the June renewals fast-approaching.

Florida Citizens is a significant buyer of both traditional reinsurance, collateralized or fronted protection from ILS fund markets, and, of course, catastrophe bonds.

As we explained earlier today, Citizens had been hoping to use a maximum budget of $400 million to procure a risk transfer program featuring almost $4.7 billion of limit, the majority of which would be newly purchased at this renewal.

That works out to roughly $3.64 billion of new risk transfer, across traditional reinsurance and catastrophe bonds, that would be procured at the June renewals, while rolling forwards with some $1.06 billion of in-force multi-year cat bonds as well.

All at a forecast cost that it was hoped a few weeks ago would still come in below the top-budget $400 million.

But how things change, as during today’s meeting CFO of Citizens, Jennifer Montero, exclaimed that “The markets are in complete disarray,” since the last board meeting in March.

Because of this, she explained that there is “significantly reduced available global capacity” for reinsurance and capital markets backed risk transfer, while also citing rate increases of between 10% and 30%.

Referencing the return period to which Florida Citizens tries to buy its reinsurance, Montero said, “It’s very difficult to place a full risk transfer program up to 1-in-100-year even, when price increases are in the range of 10 to 30%.”

At the meeting, it was disclosed that due to rising rates in reinsurance and cat bond markets, the $400 million budget may now only cover roughly 90% of the targeted risk transfer.

During the commentary, Montero said the catastrophe bond market has “plummeted” in recent weeks, while the whole risk transfer market is said to be in disarray, reducing availability of capacity.

As a result of a contraction of available cat bond capacity, plus the busy pipeline, Montero said deals are generally smaller than expected and getting done at higher pricing.

Which is how the Citizens cat bond, the targeted $200 million Everglades Re II Ltd. (Series 2022-1) deal for its Personal Lines Account, is likely to turn out, as Montero warned, “The final size will most likely be smaller than expected, with pricing outside of the initial guidance.”

The $400 million budget is now expected to cover roughly $4.25 billion of the Florida Citizens risk transfer program needs therefore, while filling 100% of the program would be estimated to cost closer to $433 million.

Montero explained that there are additional strains on the reinsurance and catastrophe bond market this year, due to global macro effects, the conflict between Russia and Ukraine, as well as rising inflation.

At the end of the meetings discussion of the risk transfer budget, the budget of up to $400 million of spend was approved, with the understanding that as much reinsurance and capital markets risk transfer as possible will be purchased and that it is unlikely to stretch to more than 90% of the targeted limit for 2022.

The commentary from Florida Citizens provides a stark view of mid-year 2022 reinsurance renewal market dynamics, which look set to get even more challenging as the renewal nears and capacity availability dwindles.

Those who got out early and signed firm orders prior to May will be delighted with their foresight this year, as these renewals are a sellers market and capacity is clearly king at this time.

Also read:

Florida Citizens targets $3.64bn 2022 risk transfer buy, for $4.7bn program.

Florida Citizens new Everglades cat bond sized up to $200m as price rises.

Policy growth means more cat bonds & reinsurance for Florida Citizens.

Florida Citizens seeks higher rate increases at upcoming hearing.

Florida Citizens targets “the best deal we can get” on risk transfer: Montero.

Florida Citizens debates buying from zero to $3.4bn of risk transfer.

Florida Citizens staff call on Board to publicly support risk transfer.

Florida Citizens reinsurance & cat bond budget hiked ~60% for 2022.