Florida’s Citizens Property Insurance Foregoes Pre-Event Financing, Moves Forward with Risk Transfer Program

 

At its meeting yesterday, February 14, 2013, Citizens Property Insurance Corporation (“Citizens”) Chief Financial Officer Sharon Binnun advised Citizens’ Board of Governors (“Board”) to forego a previously-recommended $600 million pre-event liquidity financing program because the State-run insurer has adequate cash available to cover claims for the next two years, and therefore isn’t expected to incur more debt.

To view the meeting materials, click here.

“For the first time since I have been at Citizens, we have not needed liquidity,” said Ms. Binnun, who was hired in 2007. “I think this is really big news.”

The primary reason for the reduced need is the large number of policies that have been absorbed by private insurers as part of Citizens’ ongoing depopulation efforts, she said.  Earlier this week, the Board approved a takeout of 31,000 policies by Weston Insurance Company (“Weston”), a measure that will ultimately remove $30 billion in exposure from Citizens’ Coastal Account.

Pre-event liquidity serves as a bridge to the reimbursements provided by the Florida Hurricane Catastrophe Fund.  Citizens can also levy various assessments after a catastrophic event, but funds are not immediately available.  Florida has not suffered a direct hit from a hurricane in seven years.

Citizens had budgeted $11.5 million in interest for the now forgone 2013 pre-event liquidity financing program.

“It is my recommendation that we do not obtain any new liquidity.  If our financial situation changes, we certainly have the ability to respond proactively at that time,” Ms. Binnun added.

In the past year, Citizens has aggressively pursued depopulation.  The Weston takeout approved by the Board on February 11 is expected to result in an approximate $840 million decrease in Citizens’ high-risk Coastal Account’s probable maximum loss in the event of a one-in-100-year storm.  That takeout, slated to occur between March and June 2013,  also marks the first time in Citizens’ history that commercial wind-only policies will have been removed from the insurer-of-last-resort’s Coastal Account.

In other business, the Board unanimously voted to proceed with the development of a 2013 risk transfer program for the Coastal Account using both traditional and capital markets.  The program specifics will be reviewed by the Board prior to any financial transactions.

Under the proposal, Citizens would transfer $1.75 billion in risk for an aggregate 2013 budgeted cost of $327 million.   The transaction is proposed to include $250 million in capital markets risk transfer for the Coastal Account.

To accomplish that, Citizens would enter into a multi-year, fully-collateralized reinsurance contract with Everglades Re, a special purpose insurer.  Last year, Citizens entered the catastrophe bond market by issuing $750 million in bonds through Everglades Re.

Citizens would also conduct a traditional reinsurance placement of $500 million for the Coastal Account.

The Board also heard a report by Citizens’ new Vice President of Human Capital Management Charles Johnson on an array of internal policy changes that are underway.

Mr. Johnson said he has reviewed policies involving corrective action, relocation, and employee severance, and is working to create policies that will be transparent and easy to understand-all with clear expectations and consequences.

It is important to be able to resolve matters quickly, get employees back to work and take care of customers, Mr. Johnson said.

Board member Tom Lynch wondered what policy changes would be made related to expenses, an area that has drawn considerable negative media attention because of certain employees’ spending habits.

Citizens’ CEO and President Barry Gilway said he will be recommending that Citizens follow the State of Florida’s expenses plan with some minor variations that are consistent with the way State agency personnel handle both national and international travel.  Citizens’ policies and procedures have been under review by the Florida Office of the Inspector General, who also issued a report with recommendations.

Mr. Gilway said a formal recommendation on internal policies will be made to the Board in March.

With no further business before the Board, the meeting was adjourned.

 

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