Citizens closes $750 million ‘historic’ bond deal
Citizens Property Insurance Corp. on Tuesday closed on the sale of $750 million in hurricane bonds, a move officials of the state-backed insurer say will cushion policyholders from assessments that would kick in following a catastrophic storm.
Nearly three times larger than originally planned, the sale is said to be the largest of its kind and a significant development in how the state chooses to protect itself from damages that exceed its ability to pay in cash, Citizens Chairman Carlos Lacasa said Tuesday.
“(This is) a historic day for the state of Florida in reducing the potential for assessments on all Florida policyholders after a catastrophic event,” Lacasa said in a statement.
The Citizens governing board cleared the way in December for $1 billion in pre-event financing for the state-backed insurer that now holds nearly 1.5 million policies.
The initial plan was to sell about $250 million in catastrophe bonds and secure the remaining $750 million in coverage through traditional reinsurance companies.
But interest in the investments, which will provide a 17.75 percent annual return if no storms occur over the next two years, was such that the state was able to sell $750 million instead.
“We were very pleasantly surprised,” said Sharon Binnon, Citizens’ chief financial officer.
The bonds were sold to private investors through a Bermuda-based company, Everglades Re Ltd. For that coverage, policyholders will collectively pay about $143 million a year for the next two years.
The success of the sale prompted board members to increase the state’s pre-event coverage to $1.5 billion, which would further insulate rate-payers from assessments that kick in if Citizens can’t pay its claims.
Proceeds from the sale will be tapped if losses in Citizens’ coastal account exceed $6.35 billion during each of the next two years. Proceeds not spent during the 2012 hurricane season would be available for the losses in 2013.
Binnon said the sale has the added benefit of relieving pressure on the demand for reinsurance, which will benefit private insurers as well as Citizens.
Insurance industry representatives say the sale is significant in that it provides yet another source of claims-paying revenue that can be tapped in the event of storms.
“This is a true transfer of risk from Citizens and the potential of assessments it would have to impose on everybody in Florida to the private market,” said Sam Miller, executive vice president of the Florida Insurance Council.
“That is very important by reducing the statewide assessments that may be needed,” Miller said.