Louisiana Citizens to consider another catastrophe bond, if the price is right

by Artemis on March 19, 2013

With catastrophe bond rates seemingly near all-time lows it’s no surprise to hear that another of the U.S. state based property insurers of last resort plans to assess whether a cat bond could be cheaper than reinsurance at its next renewal. Louisiana Citizens Property Insurance Corporation, which sponsored its first cat bond Pelican Re Ltd. last year, may return to the cat bond market as part of its reinsurance renewal if rate conditions are conducive for cat bond issuance.

Louisiana Citizens plans to increase its reinsurance spend this year, seeking to take advantage of what could be attractive rates caused by an abundance of capital in the collateralized reinsurance or ILS markets. According to an article on the RiskMarketNews blog, who told us they spoke directly with Louisiana Citizens CFO Steve Cottrell on the phone recently, the spend on reinsurance is likely to increase from $68m in 2012 to $75m on reinsurance premiums in 2013.

According to Cottrell, as part of its plan to increase its reinsurance cover, the catastrophe bond market will be analysed to see where the cover can be acquired most cost-effectively and at the best terms. Should the cat bond market prove most attractive from a rate and premium perspective then a Pelican Re 2013 could be on the cards.

According to RiskMarketNews the Louisiana Citizens board approved the plan to increase its reinsurance coverage at its most recent board meeting last Thursday.  Cottrell told RiskMarketNews that he understood that rates may be down in the cat bond market due to an influx of capital into the market. That may factor into the insurers decision about where to secure the additional reinsurance cover, Cottrell said.

Cottrell said that the goal was to get to 1-in-100 year storm coverage and that Louisiana Citizens will secure the coverage in whatever form is most cost-efficient. He said; “I don’t find that cat bond process much more onerous than reinsurance. If that’s a better program, that’s what we will do. We have to test the market first.”

With the board having approved the plan to increase reinsurance cover this year Louisiana Citizens will now be in discussion with its broker Aon Benfield, on the most efficient way for it to achieve the largest amount of cover at the upcoming June renewals. Whether that is traditional reinsurance, investor backed collateralized reinsurance or a catastrophe bond is seemingly just a matter of what will be most cost-effective, work best for the insurers goal of covering a 100 year storm and be realistically achievable in the available time.

It’s no surprise that Louisiana Citizens would take another serious look at the cat bond market this year, given the insurers financial position and limited room to expand its reinsurance protection. With rates on recent cat bonds seemingly low right now, as evidenced by the recent Caelus Re drop in pricing, and some predicting that this is a trend likely to continue, this could be an opportune time for a Pelican Re 2013 cat bond deal.

With a second Florida Citizens cat bond currently being marketed to ILS investors (Everglades Re Ltd. (Series 2013-1)) offering riskier notes at a much lower premium than the 2012 cat bond, how that deal prices will be key in forecasting whether renewal rates for Louisiana Citizens may be attractive enough in the cat bond market right now.

We’ll update you if/when we hear anymore on a potential cat bond from Louisiana Citizens.

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