Florida Citizens expects slightly higher risk transfer rate-on-line for 2024

Florida’s Citizens Property Insurance Corporation, the insurer of last resort that is currently in the catastrophe bond market with a new issuance that could approach $1.25 billion in size, expects that the rate-on-line across its reinsurance and risk transfer purchases for the 2024 hurricane season could be slightly higher than the prior year.

This despite the Florida reinsurance renewals expected to range from down -5% to up +5% this year, Florida Citizens CFO Jennifer Montero explained today during a Board meeting.

Montero explained how reinsurance market conditions are looking as the mid-year renewals fast-approach, noting that appetites for risk have adjusted in recent months.

She said that, “The reinsurance markets are better than last year but have significantly changed since the beginning of the year. There were significant amounts of capital invested in reinsurance markets in the last quarter of 2023, as interest rates were starting to come down with the expectation of Fed rate cuts.

“However, as inflation continued the Fed changed its stance to higher-for-longer and now investors are trying to capitalise on higher rates.

“Therefore, they’ve been moving some of the capital from reinsurance markets to alternative investments, including private credit where their returns are higher.”

Which is an interesting and notable observation from Montero, especially given the recent trend towards spread widening and higher issuance pricing in the catastrophe bond market, where investors have certainly upped their return requirements in the last few weeks.

Montero also noted that coastal and catastrophe exposed reinsurance buyers are purchasing more cover in 2024, particularly the residual markets, such as in Texas, Louisiana, California and Florida, given their escalating exposure levels, but also in Florida specifically because government-backed reinsurance layers the RAP and FORA have not been continued this year, so demand is up and capacity as a result remains constrained.

Highlighting the role of exposure and inflation in this, Montero said, “Citizens’ exposure grew by 31% in 2023, and is expected to grow by 7% this year, even though we expect only a slight change in the policy count in 2024.”

That has driven Citizens significant need for reinsurance this year, with $5.5 billion from its catastrophe bonds and reinsurance program needed this year.

As we reported earlier today, Citizens needs to increase its budget for risk transfer to $750 million in 2024, up from around $650 million a year earlier.

The exposure growth is the main driver, as well as the fact much more protection is required to cover that.

At the Board meeting, the increased budget was approved, Artemis can report, which is a maximum that Citizens staff can spend up to, to secure the necessary $5.5 billion cat bond and reinsurance tower.

Montero pointed out that Citizens can and will walk away, if it feels it cannot buy the protection at prices it deems to be reasonable, so if the market were to suddenly harden further specific purchases could shrink, or spend by shifted, or the entire buy be downsized, as we saw in 2022.

As well as needing to buy much more, to cover its higher insured values, Florida Citizens staff also expect a slightly higher rate-on-line will need to be paid across the reinsurance program.

Montero said that the rate-on-line (ROL) is expected to be 13% for the reinsurance and cat bond purchases this year, at the $750 million budget level to buy up to $5.5 billion of protection needed.

That’s up from a reported 12.69% for 2023, when much less protection was required.

But, it’s important to also remember that Florida Citizens merged its coastal, personal and commercial accounts into a single reinsurance tower, the Citizens Account, for 2024.

So the way the reinsurance is bought has changed quite significantly this year, which could also drive some adjustments to how the rates flow across the cat bond and reinsurance purchases.

Also read:

– Florida Citizens budget for 2024 cat bonds & reinsurance lifts to $750m max.

– Florida Citizens sets up to $1.25bn target for new Everglades catastrophe bond.