The Board of Florida’s Citizens Property Insurance, the state backed property insurer of last resort, has just approved its reinsurance and risk transfer plans for 2013 including the second catastrophe bond from the insurer, Everglades Re Ltd. (Series 2013-1). The Board made it clear just how much they appreciate the risk transfer from the capital markets, extolling the efficiencies it finds in cat bonds and the extremely attractive pricing terms it has secured.
The second Everglades Re cat bond is providing cover for a more risky tranche of its reinsurance programme, yet it has priced significantly more cheaply than the first cat bond it issued last year. The initial attachment point is set at $5.139 billion of indemnity losses to Citizens and the initial exhaustion point is $5.389 billion. For reference the 2012 deal attached at $6.35 billion.
Pricing for last years Everglades Re cat bond was at 17.75%, a reasonable level for the risky coastal account properties it covers due to the regions hurricane exposure. However, showing the appetite for cat bonds from investors and the extremely attractive pricing, this years Everglades Re 2013 cat bond was marketed with a coupon price range of 11% to 12%.
Citizens board meeting documents had suggested that it would likely price at 12%, but in the meeting today (which is still ongoing) Citizens CFO Sharon Binnun was delighted to reveal that the pricing finished at 11.5% all in cost to the insurer, which we’re told is actually a coupon of just 10% to investors. That means pricing dropped by 1% below the marketed range and the saving to Citizens, compared to last year is significant.
Consider that this is a riskier tranche of cat bond notes, pricing for 7+% cheaper than a less risky tranche did last year, and the ramifications of this kind of pricing become more clear. Cat bonds are offering amazing value to sponsors right now and this is a significant win for Florida Citizens as they are reducing the cost of their risk transfer significantly. Citizens also believe that from a risk transfer point of view it is now in the best position it has ever been should a hurricane event strike in 2013.
CFO Binnun said that details on the savings would be forthcoming, but one of the Board members hazarded a guess that this layer may have saved them between $15m to $20m. Binnun also mentioned that Citizens staff found this 2013 cat bond significantly easier to issue than 2012, with the previous years having laid a lot of the groundwork and prepared the insurer.
The cat bond remains at $250m in size we believe, but the deal has not yet completed. Citizens CFO Binnun left the meeting to get straight onto a call to finalise pricing for the cat bond with transaction participants. Completion of the deal is expected next week we understand.
Recent deals have shown the appetite that investors have for cat bonds and also the value that can be found in the market by sponsors but this deal takes that message to another level and should not be understated. Cat bond reinsurance coverage offers value for money and allows these troubled state backed insurers to find value in risk transfer in ways that have not been possible before.
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