Everglades Re Ltd. (Series 2014-1)

With the issuance of Everglades Re Ltd. Series 2014-1 Florida Citizens is seeking a fully-collateralized source of reinsurance protection against hurricanes, on an annual aggregate basis and using an indemnity trigger. The covered business is both personal and commercial residential policies from Florida Citizens coastal account.

Artemis understands that the initial attachment point for this cat bond will be at $5.202 billion and the initial exhaustion point will be at $7.702 billion. Yes, that’s a $2.5 billion layer of Citizens reinsurance tower, so it will be interesting to see how large the 2014-1 Everglades Re issuance can grow to. Market sources suggest it is likely to increase in size beyond the $400m preliminary size being marketed, but how much is hard to predict.

The initial attachment probability for the notes is 2.89%, the exhaustion probability is 1.72% and the expected loss is 2.3%. The transaction features a variable reset feature, we understand, which will see the attachment probability sit between 2.74% and 3.04% with investors being compensated with a variable interest coupon should it move at reset.

We understand that the deal is being marketed with a preliminary price guidance range of 6.5% to 7.75%. That is significantly below Florida Citizens other cat bonds, Everglades Re 2012 priced at 17.75% while Everglades Re 2013 priced at 10%.

While it is hard to compare per-occurrence and aggregate cat bonds on a risk basis, the 2014 pricing is very low for a deal which essentially sits at the same level in the reinsurance tower as the 2012 cat bond, while paying less than half the coupon.

If you consider the fact that one large hurricane can wipe out a per-occurrence cat bond or an aggregate cat bond, that the attachment point is very similar and these cover the same layer, then Everglades 2014 could price as much as 60% cheaper than the 2012 deal.

Once again this clearly demonstrates the reduction in cat bond rates seen in recent years. However, if you consider that year-on-year pricing has declined by 40% on some cat bonds, perhaps a two-year drop of 60% is reflective of investor appetite and recent pricing.

It will be interesting to see who invests in this cat bond. The previous Everglades Re cat bonds have seen fixed income investors from outside the ILS space investing in the deals. It is possible that Citizens may be looking for significant support from these types of investors once again in 2014, especially if it wants to upsize it considerably.

Standard & Poor’s has given the single tranche of Series 2014-1 notes to be issued by Everglades Re Ltd. a preliminary rating of ‘B(sf)’.

Update 1:

Everglades Re Ltd. (Series 2014-1), is set to become the largest single cat bond transaction ever having increased in size by a stunning 213% to reach $1.25 billion.

The latest pricing guidance for the now $1.25 billion of cat bond notes has narrowed to 7.25% to 7.5%, we understand. So if the deal prices at 7.25% it would be just above the mid-point of the launch guidance, or at 7.5% it would actually be slightly more towards the upper end of the launch guidance.

Update 2:

The Everglades Re 2014-1 catastrophe bond grew in size again before close, reaching another record at $1.5 billion.

At the same time the pricing settled at the upper end of the narrowed range, at 7.5%.