2014 Risk Transfer Analysis

Transcription

1 2014 Risk Transfer Analysis April 2014

2 Funding Hurricane Losses In terms of hurricane losses, Citizens meets its policyholder obligations through the following three funding mechanisms: Internal Surplus accumulated through current and prior year operations; a portion of Citizens premiums is used to accumulate surplus for hurricanes External risk transfer (FHCF and private reinsurance) External levying assessments The increase (or decrease) in any of these funding sources decreases (or increases) the reliance on other funding sources to meet policyholder obligations in the event of a hurricane. With the primary goal of reducing its reliance on assessments, Citizens must focus on the other two funding mechanisms surplus and risk transfer as a means to fund its policyholder obligations in the event of a hurricane. 2

3 Assessment Reduction Estimate Implementing the assumptions below, estimated reductions in Total Assessments from the proposed risk transfer program are as follows (in millions): Annual Total Assessment (Citizens PH Surcharge, Regular and Emergency Assessments) Actual Actual Actual Assumption based Estimate PLA/CLA $ 2,892 $ 3,134 $ 906 $ $ $ Coastal 8,719 6,396 4,622 2,676 1,951 1,309 Combined $ 11,611 $ 9,530 $ 5,528 $ 2,676 $ 1,951 $ 1,309 Annual reduction $ (2,081) $ (4,002) $ (2,852) $ (726) $ (642) Cumulative reduction (since 2011) $ (2,081) $ (6,083) $ (8,935) $ (9,660) $ (10,302) Annual reduction 17.9% 42.0% 51.6% 27.1% 32.9% Cumulative reduction (since 2011) 17.9% 52.4% 77.0% 83.2% 88.7% Assumptions: 3 [A] 1/100 PML reduced by 7% per year [B] FHCF coverage reduced by 7% per year consistent with PML reduction [C] Net income reduced by 10% per year to reflect decrease in premium volume [D] Increase in Regular Assessment of 5% (policies leave Citizens and are taken by private market, thus increasing assessment base) [E] Risk transfer provides coverage of $2,884 million at a proposed cost of $300 million per year, for 3 years; the proposed spend of $300 million may provide for an additional $250 million of coverage

4 2014 Risk Transfer Program Benefits The proposed 2014 risk transfer program will provide the following benefits: Multi year coverage: within certain layers, the coverage and pricing purchased by Citizens will be fixed and will cover hurricane seasons in 2014, 2015, and This locks in the cost and coverage for 3 years and could reduce the impact of any change in reinsurance market conditions in subsequent years. Aggregate annual coverage: coverage will be in place and provide protection in the event of multiple storms. Prior to 2014, Citizens reinsurance program covered single events; with aggregate protection, Citizens surplus is further protected should multiple storms strike Florida, and/or the FHCF is exhausted. CNR: the 2014 program includes coverage for commercial non residential risks (CNR). Prior to 2014, only residential risks were covered under Citizens reinsurance agreements. Note that the FHCF does not cover CNR. Reinsurance coverage for CNR risks will result in Citizens retaining less hurricane exposure for this specific group of risks. 4 Pricing: pricing for the 2014 risk transfer program highlights the dramatic reduction in the cost of reinsurance. The following slide presents an analysis of the pricing since Citizens re entered the reinsurance market (2011).

5 Historical Pricing Analysis $3,500 Total Risk Transfer ( ) Risk Transfer Spend (B) 24.0% $3,000 Risk Transfer Amount (A) $2, % $2,500 Risk Transfer Rate On Line (B / A) (secondary axis) 20.0% ns) $2,000 $1, % ($ millio $1,500 $1, % 14.0% $1,000 $500 $124 $575 $276 $304 $ % 10.0% $ (Projected) 8.0% Total Risk Transfer Program (in millions) (Projected) Risk Transfer Amount (A) $ 575 $ 1,500 $ 1,854 $ 2,884 Risk Transfer Spend (B) $ 124 $ 276 $ 304 $ 300 Risk Transfer Rate On Line (B / A) 21.5% 18.4% 16.4% 10.4% Percentage Change in Year over Year Total Risk Transfer Coverage 160.9% 23.6% 55.6% Percentage Change in Year over Year Total Risk Transfer Premium 122.9% 10.3% 1.3% 5 Amount Change in Year over Year Total Risk Transfer Coverage $ 925 $ 354 $ 1,030 Amount Change in Year over Year Total Risk Transfer Premium $ 152 $ 28 $ (4)

6 2014 Risk Transfer Program Budget Considerations The 2014 budget presented to and approved by the Board of Governors in December 2013 included budgeted reinsurance spend of $200 million The budgeted risk transferred (i.e. potential reduction in assessments) was $1.854 billion The proposed 2014 risk transfer program is estimated to cost approximately $300 million, or $100 million beyond the initial budget but will result in a reduction of potential assessments in excess of $1.0 billion (in millions) Budget Proposed Variance Coverage $ 1,854 $ 2,884 $ 1,030 Spend $ 200 $ 300 $ 100 6

7 PLA/CLA Estimated Liquidity & Claims Paying Resources 1 Projected 2014 Season: Single Event Occurrences Single Occurrence Loss + LAE (not to scale) l) 7 1 Please see Notes & Assumptions attached hereto

8 Coastal Account Estimated Liquidity & Claims Paying Resources 1 Projected 2014 Season: Single Event Occurrences Single Occurrence Coastal Loss + LAE Non CNR Loss + LAE (not to scale) l) 8 1 Please see Notes & Assumptions attached hereto

9 Coastal Account Estimated Liquidity & Claims Paying Resources 1 Projected 2014 Season: Aggregate PMLs Aggregate PMLs Coastal Loss + LAE Non CNR Loss + LAE (not to scale) l) 9 1 Please see Notes & Assumptions attached hereto

10 2014 Estimated Claims-Paying Ability (Projected) ($ in billions) Source PLA/CLA Coastal Combined Projected surplus 12/31/2014 $ 4.3 $ 3.4 $ 7.6 Total accumulated surplus available for claims $ 4.3 $ 3.4 $ 7.6 Pre event liquidity $ 1.3 $ 2.6 $ 3.9 Private/capital markets risk transfer $ $ 2.9 $ 2.9 FHCF (Mandatory layer only) $ 1.7 $ 2.9 $ 4.6 Total claims paying py ability $ 7.3 $ 11.8 $ 19.1 Notes: 1. Surplus amounts consist of preliminary (unaudited) 2013 surplus and 2014 projected net income. 2. FHCF coverage is based on preliminary 2014 retention and payment multiples, but the actual retention and limits may be significantly different from these estimates.

11 Citizens Estimated Claims Paying Resources: 2014 Notes & Assumptions ASSUMPTIONS Citizens 2014 Estimated DWP $2.42 Billion Citizens Policyholder Surcharge Maximum % Per Account 15% 2014 Regular Assessment Base (projected) $33.76 Billion Regular Assessment Maximum % Per Account 2% for Coastal; 0% for PLA/CLA 2014 Emergency Assessment Base (projected) $36.19 Billion PML based on modeled losses as of December 31, 2013 per AIR CLASIC/2, Version 15 based on a weighted average of Standard Sea Surface Temp (SSST) and Warm Sea Surface Temp (WSST) Event Catalogs including Demand Surge, excluding Storm Surge, and include 10% of loss to account for LAE. Interim Return Periods are derived by Linear Interpolation 2014 Surplus = unaudited projected 2013 surplus projected net income assuming no hurricanes. Citizens 2014 FHCF coverage is based on preliminary retention estimates and payment multiples. Actual Citizens FHCF attachment and limits of coverage could differ significantly from estimates. NOTES These charts are imperfect! They attempt to show projected claims paying resources, but they are approximations only. Four significant complicating factors are described below: 1) Coastal PML vs. PLA/CLA PML: An actual 100 year PML event in Coastal Account may not be a 100 year PML event for PLA/CLA. The relative magnitude of actual losses for Coastal and PLA/CLA will depend on the storm size and path 2) Combining PLA and CLA: The PLA and CLA are separate accounts for deficit calculation and assessment purposes, but are combined for FHCF and credit purposes. It is impossible to accurately show the PML resources situation of these accounts on either separate or combined charts since simplifications must be made in either case that could prove materially inaccurate. Although we show the combined accounts, there is no guarantee that they will have deficits at the same time or of similar magnitude 3) Non residential exposure: Commercial non residential (CNR) exposures in the CLA and Coastal Account are not reinsured by FHCF. Actual deficits and assessments may be significantly different than an aggregated PML would otherwise indicate. The charts include a provisional estimate for CNR losses as 10% of total losses in the Coastal Account for all return times. CNR is a negligible portion of the PLA/CLA Accounts and so is not considered in that chart 4) Liquidity: These charts do not show the liquidity needs of the accounts. An account with ample PML resources may still require liquidity as many of the PML resources are not available immediately following a major hurricane. The timing and magnitude of receivables such as FHCF recoveries and assessments are unknown. 11