LONDON (Reuters) - Florida Citizens Property Insurance Corporation will sell $250 million of hurricane coverage to investors in 2013 to recoup some of the cost of covering natural disasters in the state, the insurer said.
Florida Citizens said it would increase its hurricane protection coverage to $1.75 billion this year, by selling an extra $250 million via a “catastrophe bond”, notes from a board meeting showed.
The state-backed insurer sold a $750 million cat bond last year, saying it was cheaper than buying traditional reinsurance for Florida hurricane risk.
Cat bonds allow insurers and reinsurers to pass on some of the natural disaster risk on their books to capital market investors, freeing up capital for other parts of their business.
Buyers of cat bonds benefit from returns that are largely insulated from wider economic or financial market developments, but risk losing some or all of their money if a catastrophe occurs.
The cost of insuring hurricanes in the United States’ most vulnerable regions have become more expensive, especially in high-value areas like Miami, as the population grows and insurance penetration rises.
Catastrophe risk assessor RMS upped its losses on Florida hurricanes by 6.5 percent in 2011.
In its $1.75 billion budget, Florida Citizens will sell an extra $250 million of coverage via the capital markets, and buy $500 million from traditional reinsurance - which covers insurance companies looking to unload risk, the insurer said in a statement.
Florida Citizens is the state’s largest property insurer and handles nearly 1.5 million policies and faces more than $500 billion in potential risk.
By law, the company has to find enough cash to cover any potential claims from a hurricane so big that it only that happens once in every 100 years.
If Florida Citizens needs reinsurance, it gets much of that coverage from the Florida Hurricane Catastrophe Fund, which funds any payouts by issuing billions of dollars in municipal bonds after a major hurricane has already struck.
But these funds have not been enough to cover all the claims going back to Hurricane Andrew in 1992, so Florida Citizens tapped the private reinsurance sector and the capital markets to help it pay its claims quickly.
Investors had been expecting Florida Citizens to come back to the cat bond market after the insurer secured $750 million of hurricane protection via a cat bond last year.
A the time, the bond had been expected to raise just $200 million, but was increased by $550 million after high investor interest in the deal brought down the price of the deal, making it cheaper for Florida Citizens to buy cover through the cat bond market than through traditional reinsurance.
In another attempt to lighten the burden of paying claims, Florida Citizens transferred 31,000 policies totaling $30 billion of coastal wind exposure on its book of business to start up Florida insurer Weston Insurance Company last week.
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Reporting by Sarah Mortimer; Editing by Louise Heavens