Structure Considerations

Transcription

1 Citi 2013 C it l Citizens 2013 Capital Structure Considerations

2 FINANCIAL GOALS & OBJECTIVES Citizens primary financial goals are to: Establish adequate liquidity mechanisms to meet cash flow needs associated with storm losses Provide sufficient claims paying resources to cover claims associated with storm losses By statute Citizens is also required to make its best efforts to procure catastrophe reinsurance at reasonable rates, to cover its projected 100 year probable maximum loss as determined by the board of governors 1

3 CAPITAL STRUCTURE CONSIDERATIONS Citizens has significant claims paying resources, but also has a large gap between PML and surplus Projected for 2013, surplus $6.4 billion combined; $3.0 billion for Coastal Account, $2.0 billion for PLA, and $1.4 billion for CLA year PML $21.3 billion combined; $13.6 billion for Coastal Account, $6.4 billion for PLA, and $1.3 billion for CLA ($ in billions) Coastal PLA CLA Combined Surplus (2013) $3.0 $2.0 $1.4 $ Year PML $13.6 $6.4 $1.3 $21.3 Gap excl FHCF, risk transfer, assessments $10.6 $4.4 $0.1 $14.9 Citizens has access to claims paying py resources to fill in these gaps, gp, BUT Some are structurally or functionally illiquid, particularly the FHCF ($6.0 billion of combined Citizens coverage with an attachment point of $2.6 billion) These illiquid sources require external liquidity sources to ensure timely claims payment to policyholders Other layers of Citizens capital structure require assessments, BUT External risk transfer in the Coastal Account has significantly reduced the possibility of assessments Traditional reinsurance program in place for $250 million with an additional $500 million expected to be placed in 2013 for a total traditional risk transfer placement of $750 million Capital markets risk transfer of $750 million in place and an additional $250 million is expected to be placed in 2013 for a total capital markets risk transfer of $1 billion 2

4 2013 CAPITAL STRUCTURE RECOMMENDATIONS Replace maturing pre event bonds in the Coastal Account in the amount of approximately $600 million to lock in currently low interest rates with longer duration pre event bonds Pursue an additional $250 million in capital markets risk transfer for the Coastal Account Pursue the replacement of $500 million in traditional reinsurance for the Coastal Account These three initiatives will be parallel tracked, with the goal of completing them in the most efficient manner: (1) Capital markets risk transfer for the Coastal Account (2) Traditional reinsurance program for the Coastal Account (3) External liquidity program for the Coastal Account All three programs should be in place prior to the start of hurricane season 3

5 CAPITAL STRUCTURE OVERVIEW How the Pieces Fit Together Cat bonds capital markets portion of this layer achieves risk transfer benefits and diversifies supply and can reduce overall cost of risk transfer Pre event bonds or other external liquidity sources provide liquidity mainly for all or a portion of FHCF not covered by surplus to provide for timely payment of claims after an event, and gives Citizens flexibility in the timing of post event bonding. Interest is secured by net premiums and surcharges and interest earningson bond proceeds. Principal is secured by bond proceeds. In order to draw upon bond proceeds a draw certificate is required, which details the repayment source(s) of bond proceeds Assessments Private Risk Transfer Assessments provide financial resources beyond surplus, risk transfer and FHCF Traditional reinsurance portion of this layer transfers risks out of Florida and reduces the amount and/or probability of assessments External liquidity and risk transfer are not substitutes for each other they perform different roles in the capital structure and reduce the probability and amount of assessments. 4 Surplus provides claims paying and liquidity below and partially into the FHCF layer

6 WHY CITIZENS ISSUES PRE EVENT BONDS Citizens pre event bonds provide multiyear liquidity to help ensure valid claims are paid timely after a hurricane Citizens Primary Claims Paying Resources Citizens has multiple claims paying resources, but some of them are not immediately available postevent pre event financing helps provide a bridge to those sources, particularly reimbursements from the FHCF Draws on any liquidity financing instruments are intended to be repaid primarily from FHCF reimbursements or assessments Assessments Private Risk Transfer Pre event bonds provide a cash bridge to Citizens claims paying resources Pre Event Bonds 5

7 CAPITAL MARKETS RISK TRANSFER STRUCTURE Everglades Re provides Citizens with indemnity, multi year collateralized annual aggregate protection An Everglades Re 2013 transaction would have the same structure as the Everglades Re 2012 I transaction Indemnity coverage Advance payments for reserved losses The capital markets risk transfer has full collateralization and high degree of innovation and customization on the financing, which provides Citizens with market diversification Transaction Structure Citizens Property Insurance Corporation Premium Reinsurance Agreement Everglades Re Ltd. Principal & Interest Proceeds Series 2013 I Investors Proceeds Investment Yield Collateral Trust Account (Treasury MMF) 6

8 CITIZENS ESTIMATED LIQUIDITY RESOURCES AND NEEDS FOR 2013 (Dollars in Millions) 2013 Pro Forma Liquidity Sources PLA / CLA Coastal Combined Beginning Surplus 1 $ ,135 $ ,890 $ ,025 Budgeted Net Income Change in Non Admitted Assets and Other Charges Total Internally Funded Liquidity Sources $ 3,369 $ 3,011 $ 6,380 Existing Pre Event Liquidity Series 2009 Pre Event Bonds $ $ Series 2010 Pre Event Bonds 1,340 1,340 Series 2011 Pre Event Bonds Series 2012 Pre Event Bonds 1,300 1,300 Series 2013 Pre Event Bonds Total Externally Funded Liquidity Sources $ 1,300 $ 3,650 $ 4,950 Total Liquidity Sources $ 4,669 $ 6,661 $ 11,329 Liquidity Needs (Using Projected FHCF Mandatory Layer Metrics) 100% of FHCF Mandatory Layer $ 2,548 $ 3,499 $ 6,047 FHCF Retention 1,081 1,484 2,566 FHCF Mandatory Layer Co Pay Commercial Non Residential Claims Below and Along Mandatory Layer Total Liquidity Needs (Using FHCF Mandatory Layer Metrics) $ 3,913 $ 5,969 $ 9,881 Liquidity at 100% of FHCF Mandatory Layer $ 3,913 $ 5,969 $ 9, Year PML (AIR; 1/3rd Historical and 2/3rd Stochastic Based on Single Event Occurrence with 10% LAE) $ 7,709 $ 13,579 $ 21,288 1 Beginning surplus represents unaudited surplus as of December 31,

9 CITIZENS ESTIMATED ONGOING LIQUIDITY RESOURCES AND NEEDS The Coastal Account has approximately $1.5 billion of pre event bonds maturing from 2013 through 2015, $560 million mature in 2013 and an additional $418 million mature in 2014 Replace maturing pre event bonds in the Coastal Account in the amount of approximately $600 million A Series 2013A financing for the Coastal Account will allow Citizens to replace the maturing bonds at current historically low interest rates and provide long term liquidity at interest rates similar to the maturing debt Citizens Property Insurance Corporation Liquidity Summary for Coastal Account $ in millions Liquidity Resources Existing Pre Event Bonds $3,050 $2,632 $2,142 $1,344 $475 $350 $175 $0 $0 $0 $0 Series 2013 Bonds (Scenario B) $600 $600 $600 $600 $600 $600 $400 $400 $200 $200 $0 Projected Net Income $121 $121 $121 $121 $121 $121 $121 $121 $121 $121 $121 Projected Ending Surplus $3,011 $3,132 $3,254 $3,375 $3,496 $3,617 $3,738 $3,860 $3,981 $4,102 $4,223 Total Liquidity Resources $6,661 $6,364 $5,995 $5,318 $4,571 $4,567 $4,313 $4,260 $4,181 $4,302 $4,223 Liquidity Uses FHCF Retention $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 $1,484 FHCF 10% Co Pay of Mandatory Layer $389 $389 $389 $389 $389 $389 $389 $389 $389 $389 $389 CNR Claims Below and Along Mandatory Layer $597 $597 $597 $597 $597 $597 $597 $597 $597 $597 $597 FHCF 100% of Mandatory Layer Coverage $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 $3,499 Total Liquidity Uses up to FHCF Mandatory Layer $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 $5,969 Liquidity Above / (Below) FHCF Mandatory Layer $692 $395 $27 ($650) ($1,398) ($1,401) ($1,655) ($1,709) ($1,788) ($1,667) ($1,745) Without proposed $600 million financing $ 92 $ (205) $ (573) 8

10 LIQUIDITY RECOMMENDATION Coastal Account An additional $600 million to replace maturing bonds Conceptual approval at the February Board meeting Approval of financing parameters at the March Board meeting Execute financing in May PLA/CLA No additional liquidity 9

11 CAPITAL MARKETS RISK TRANSFER Capital markets risk transfer Complements traditional reinsurance Can be accessed directly or indirectly by Citizens Introduces new privateinvestors into Citizens risk transfer program Using capital markets for a portion of Citizens risk transfer can: Provide beneficial diversification Reduce counterparty risk Put downward pressure on risk transfer pricing Providecollateralized multi year protection at a fixed cost 10

12 CAPITAL MARKETS RISK TRANSFER CONSIDERATIONS AND RECOMMENDATION Authorize staff to move forward to prepare documents in support of transaction Bring transaction back to Board for a vote in March after structuring and pricing parametersaremorecertain Citizens will not be issuing bonds as partof the transaction All Citizens costs for professionals involved will be contingent on a successful transaction 11