Florida’s Citizens Property Insurance Corporation, the property insurer of last resort for the Florida market, has disclosed details of its proposed risk transfer program for the coming year, which includes a budget of $725 million to fund an additional $4.2 billion of protection.
For its Coastal Account, Citizens is set to target coverage of approximately $2.890 billion, comprised of $835 million of existing private risk transfer and $2.055 billion of new private risk transfer, with budgeted premiums of $325 million.
And for its Personal Lines Account, the proposed level of coverage is $2.919 billion, comprising $795 million of existing private risk transfer and $2.124 billion of new private risk transfer, with budgeted premiums of $400 million.
Across both accounts, then, the amount of new risk transfer sought by Citizens comes to just short of $4.2 billion, with total budgeted premiums of $725 million.
If approved, this plan would represent a major increase in Citizens’ reinsurance program and a shift in its risk transfer strategy, particularly given the difficulties it faced last year in securing a lower level of coverage, due to challenging market conditions.
As previously reported, part of the increased scope of this year’s risk transfer program will be provided by the $500 million Lightning Re catastrophe bond that Citizens issued earlier this month. Plans show that $210 million of the bond will be apportioned to the Coastal Account and $270 million to the Personal Lines Account.
But the Lightning Re issuance was also accompanied by plans to merge Citizens’ three risk transfer accounts into a single account for future years, which could make reinsurance purchases more complex this year.
The reinsurance spend budgeted by Citizens also needs to account for the hardening pricing environment heading into renewals this year, as the insurer says it expects to see rate increases of around 30% to 50% for most Florida carriers when it comes to secure its program in May.
However, in a recent market update, Citizens maintained that it sees “some positive momentum” in the risk transfer space with capital inflows due to the attractive nature of risk transfer pricing and uncorrelated risk relative to other asset classes in the current market environment.
But, while there is a significant amount of demand for risk transfer capacity from cedants, from Florida carriers in particular, it further notes that investor demand has been stable, resulting in a significantly higher spread levels than in prior years.
Likewise, Citizens points out that capital markets transactions have been able to upsize and price at levels marginally below the initial price guidance, but overall spread levels are above what has been seen in prior years due to the increased scrutiny on credit and risk, increasing cost of capital, macro‐level stress in the financial markets, and alternative investment opportunities.
In combination, these factors could mean that Citizens is faced with a repeat of 2022 at renewals this year, if it is unable to secure risk transfer protection in line with its ambition targets.
Moving forward, Citizens says its staff will work with traditional and capital markets teams, as well as its financial advisor, to evaluate available options, relating to the structure, terms, pricing, and other relevant matters with regards to structuring the 2023 risk transfer program.
Staff will then present recommendations to the Board in May for final approval of the risk transfer program.