Editor's note: Steven A. Meyerowitz, Esq., is a director of FC&S Legal. FC&S and PC360 are both owned by Summit Professional Networks.
Citizens Property Insurance Corp.'s board of governors approved a $3.1 billion risk transfer program for the 2014 hurricane season that, it said, capitalizes on favorable market conditions to increase reinsurance coverage at a lower price.
As a result, Citizens says it has raised its reinsurance protection by nearly 70% from previous levels while still anticipating growth in its 2014 surplus of roughly $600 million. After these new risk transfer transactions are closed, Citizens says it will have approximately $3.1 billion in reinsurance available in the event of a major storm or series of storms this hurricane season.
"This is incredible progress and the result of a lot of hard work," says Chris Gardner, chairman of Citizens' board of governors. "Essentially, in the last three years, we have reduced the risk to our taxpayers of an assessment by more than $9 billion, or approximately 80%."
The two-pronged risk transfer package includes a total capital markets risk transfer of $1.75 billion in catastrophe bonds issued by Everglades Re Ltd., a Bermuda-based company. According to Citizens, the 2014 issuance of $1.5 billion is the largest single catastrophe bond issuance in history. The 2014 transaction is the third transaction with Everglades Re in the past three years, including an outstanding $250 million catastrophe bond issued in 2013.
Citizens says that, unlike previous capital market risk transfers, which were structured for single events only, the 2014 transaction provides coverage on an annual aggregate basis over the next three years, protecting the state-created insurer of last resort from multiple smaller storms.
Citizens also says it has bolstered its participation in the traditional reinsurance market with the expected purchase of approximately $1.3 billion in coverage for the 2014 hurricane season, including approximately $750 million that covers aggregate losses in the event of multiple storms.
The company says the risk transfer package further reduced the burden on all Florida policyholders who might be assessed if Citizens were to exhaust its ability to pay claims. For 2014, assessments in the event of a 100-year storm would be approximately $2.4 billion, a nearly 80% decrease from the $11.6 billion assessment risk only three years ago.
The reinsurance package will cost Citizens approximately $300 million in 2014, roughly equal to the amount spent in 2013 for $1.85 billion in reinsurance coverage.
The company said that Everglades 2014 catastrophe bond was priced at a rate on line of 7.5%, less than half the 17.75% charged for the first Everglades bonds issued in 2012.
Chief Financial Officer Jennifer Montero led a negotiations team with the support of Citizens Chief Risk Officer John Rollins. "We've been able to capitalize on favorable market conditions across the board to maximize our 2014 risk transfer program," Montero says. "Such market conditions have allowed us to exceed our initial expectations in regard to the level of reinsurance coverage at the most efficient pricing."
Following the transactions, Citizens said that it will enter the 2014 hurricane season with the ability to pay all claims in the event of approximately a 70-year storm without the need to assess policyholders.
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