Citizens are ‘very unlikely’ to place 100% of risk transfer program with ‘markets in disorder’ – CFO

The board of directors of Florida’s Citizens Property Insurance Corporation today approved a proposal for the airline to spend $400 million on its risk transfer renewal for the upcoming hurricane season, although it’s expected to fill only 90% of the entire program since the appetite dwindles reinsurers.

Today the Citizens Board approved the purchase of an additional $3.64 billion in new risk transfer for both traditional reinsurance and catastrophe bonds. Combined with $1.06 billion in existing multi-year catastrophe bonds from previous years, that would bring the airline’s program to about $4.7 billion for the upcoming hurricane season.

The additional $3.64 billion is split between the company’s Coastal Account and Personal Lines Account at $1.869 billion and $2.828 billion, respectively, although some of that is already in place thanks to its use of the catastrophe bond market.

Within the Coastal Account, $625 million in catastrophe bonds remain outstanding, meaning Citizens must renew the remaining $1.244 billion. The Personal Lines account has $435 million of protections in effect from existing bonds, meaning the company will seek to acquire $2.393 billion of risk transfer on the renewals.

So across both accounts, Citizens expects an additional $3.64 billion in risk transfer at mid-year renewals, with the bulk of that coming from the traditional reinsurance market.

Citizens Chief Financial Officer (CFO) Jennifer Montero suggested to the board that the company seek to source that amount of risk transfer, which combined with existing cat bonds, brings the total to $4.7 billion on a budget increased from $400 million.

In comparison, the Citizens’ 2021 program cost $249 million with total coverage of $2.7 billion.

However, during the meeting, Montero explained that currently “even with price increases in the range of 10% to 30%, it is very difficult to place a full risk transfer program up to 1 in 100 years”.

According to Montero, “The markets are in complete disarray,” and aside from Florida state-specific litigation and wind risks, the global risk transfer market has “received additional pressures from global macro factors unrelated to the risk transfer market, such as inflation, Russia’s invasion of of Ukraine, energy crisis, rate hikes and stock market volatility.”

“As a result, all financial markets are muddled and under stress,” she continued.

Add to that the problems directly related to Florida, where reinsurers’ willingness to enter the market has declined dramatically, and it’s clear it will be a challenging renewal for some.

“Although the probability of placing 100% of our proposed program is very unlikely in the current market, we are calling for the total budgeted spend of $400 million, which is the cost to cover approximately 90% of the proposed placement, which is also.” will be a challenge to manage with the significant capacity reduction in the current market,” said Montero.

Fulfilling 100% of the proposed 2022 program would cost $433 million, Montero explained, but the reality is that the company doesn’t think it will be able to do that, and their comments actually suggest it that meeting 90% will be difficult in the current market.

Noting the challenges facing the Florida property insurance market, Citizens’ CFO expressed uncertainty about which levels of his program will be fully deployed against those that won’t.

The failure of domestic insurers in the state in recent years has meant Citizens has expanded over the past 18 months, which is why the insurer of last resort is targeting more risk transfer this year than in the past, as well as rising losses from catastrophe events and rising litigation costs .