Citizens Insurance Spends Billion$ on Reinsurance

Florida’s Citizens Issues Largest Catastrophe Reinsurance Bond on Record

Florida’s Citizens Property Insurance Corp. has entered the catastrophic bond market in a big way by issuing $750 million in bonds, making it the largest insurance-linked security deal of its kind.

Citizens Property Insurance Board Chair Carlos Lacasa declared it to be “a historical day for the state of Florida in reducing the potential for assessments on all Florida policyholders after a catastrophic event.”

According to the Artemis Catastrophic Bond and Insurance-linked Securities Deal Directory, the bonds are being issued through Everglades Re Ltd., a Bermuda domiciled special purpose insurers set-up for the sole goal of issuing Citizens-backed securities.

Initially, officials projected offering $200 million in securities. However, due to interest from investors, the deal reached $750 million making it the largest single peril cat bond in the history of the insurance linked securities market. Until then, the largest single natural catastrophe bond deal was the $600 million offering by Residential Reinsurance 2007 Ltd.

Citizens officials said that 32 investors participated in the deal, many of whom are new to the cat bond market. The investors, who have yet to be identified, likely are sophisticated institutional investors, insurance-linked investors and pension fund managers.

While the proceeds from the deal would cover both Citizens’ personal lines and its coastal lines accounts, most of it would be earmarked for wind-only coverage on properties located along the state’s coastline. The notes would cover losses above an attachment point of $6.35 billion up to $7.35 billion

The rating agency Standard & Poor’s rated the bonds at B+.

Everglades Re projected that the bonds would pay rates of return between 16.5 percent and 18 percent higher than those offered by the Treasury Money Market Fund.

Citizens Chief Financial Officer Sharon Binnun said the insurer was “pleasantly surprised,” by the size of the deal. The insurer has been working for several years to shift its financing so that it is not so dependent of policyholder assessments.

“We can’t stop the wind from blowing,” said Binnun. “But we can reduce the possibility of assessments.”

More Private Deals to Come

As significant as the $750 million industry-linked securities deal is to Citizens’ overall financial picture, officials say they are not done when it comes to seeking out more private investors’ money.

In December 2011, the Citizens board set out a goal of transferring at least $1 billion of its financial exposure to the private market. With the Everglades Re Lt., deal done, the insurer can now focus on the more traditional reinsurance market. And since many of them didn’t participate in the Everglades Re deal, they still have plenty of capital to work with.

Binnun said the Everglades Re deal opened a whole new door when it comes the capital markets, which benefits Citizens and private insurers alike.

“This brings to Citizens a significant increase in the diversification and capacity of risk transfer resources, while not adversely affecting the availability of risk transfer for the Florida private market,” Binnun said.

The Citizens board of governors is slated to meet later this month to discuss its investment strategy.

After having met three-quarters of its private risk-transfer goal, and given investors interest in the investing in Citizens, officials are likely to up the ante when it comes to executing private market deals.

“Our direction to management is to continue to secure a significant amount of additional risk transfer through the traditional reinsurance markets,” said Lacasa. “I look forward to a total risk transfer program in excess of the $1 billion budgeted for 2012.”

Florida Governor Sign Anti Fraud Bill

Florida Governor Signs Long-Awaited Auto Insurance Anti-Fraud Bill

Florida’s decade long attempt to reform the state’s automobile no-fault insurance law has finally paid off.

Gov. Rick Scott, flanked by rows of law enforcement officials and state officials, signed into law HB119, a measure that was a centerpiece of his successful 2010 run for governor. Sponsored by Rep. Jim Boyd (R-Manatee), the new law is a comprehensive re-write of the state’s automobile personal injury protection insurance law.

Among other things it requires accident victims to report an auto-related injury and seek treatment within 14 days. The policyholders could receive up to $10,000 in benefits for emergency medical care and $2,500 for other less serious injuries. The law also specifies that massage therapists and acupuncturists are no longer eligible to receive medical payments.

The new law has a host of anti-fraud provisions and attempts to control litigation costs by prohibiting the use of contingency risk multiplier when calculating attorney fees. It changes medical payments and includes a detailed list of approved medical providers who are eligible to receive PIP payments.

Scott thanked law enforcement officials, saying that “when they get involved, things get done.”

He also singled out the state’s Consumer Advocate Robin Westcott for leading a six-month study group on the issue that for the first time focused on PIP’s cost to consumers.

He also highlighted Insurance Commissioner Kevin McCarty’s role in putting the numbers together to show just how much insurance rates are being affected by PIP rates. “You were very helpful in the last week getting this thing done,” he said to McCarty.

Scott wryly noted that those affected adversely by the law are already looking for ways around the law. He cited an email from an unnamed medical provider that promised to fill out the paperwork showing an alleged accident victim had a serious injury thus being eligible for the higher benefit amount.

“They are already out there trying to game the system,” said Scott.

Since the bill was passed by the legislature, two issues have emerged as concerns.

The first is a loophole that could affect medical provider payments.

For example, medical providers and entities may charge insurers and injured parties a reasonable amount for services, which could include the use of the federal Medicare payment rates. That portion of the bill is effective July 1.

However, as of January 1, 2013, the new list of approved medical providers limits payments to groups such as physicians, hospitals, and chiropractors, and no longer includes massage therapist and acupuncturist..

Provider groups are worried that insurers will ignore the July 1 deadline and not make medical payments until the January 1 provider list becomes law. That could result in some medical providers now covered under the PIP law not receiving payments and with little recourse to do something about it.

The state, however, is already taking steps to head off any problems.

Florida Office of Insurance Regulation Jack McDermott said regulators plan to deal with the issue through rules and executive orders.

One solution already moving forward is a draft rule by the Agency for Health Care Administration, which would clarify which medical provider gets paid and during what time period.

“The purpose of the bill was not to create a six month gap,” McDermott told reporters. “AHCA has publically said that are going to issue rules to clear this up and we’ve encouraged insurers privately that PIP providers should be paid.”

Insurers are also wary of any rate cuts that are called for before the expected savings from the law are realized.

As of October 1, all insurers must submit a rate filing with the OIR that reflects a 10 percent reduction in the PIP portion of their rates and provide a detailed reason why it is unable to do so. A similar provision kicks in on January 1, which contemplates a 25 percent reduction in PIP rates.

The law calls for an actuarial study to be conducted by an independent firm that will project the law’s expected impact on PIP losses.

OIR spokesperson Amy Bogner said that regulators would still have the authority to ensure that insurers comply with state law. She pointed to that portion of the state’s rating law that requires rate changes to be actuarially justified and not “excessive, inadequate, or unfairly discriminatory.”

The legislation “would not change our current duties and our responsibilities,” Bogner said.

Following the law’s passage, Florida Insurance Council Vice President Sam Miller said that insurers are already contemplating how the new PIP law will affect their rates. He said that while the rate language concerns insurers, the fact that it is not a mandate creates the expectation that the rate decreases will be based on numbers and not just arbitrary political decisions.

“Companies are concern that rates will be rolled back before there our corresponding losses,” said Miller. “But we expect the law to operate on actuarial data and that the OIR will administer it fairly.”