Early call for Everglades Re II cat bond approved by Citizens board

The Board of Florida’s Citizens Property Insurance Corporation has approved the proposal to allow it to call (or redeem) its $300 million Everglades Re II Ltd. (Series 2015-1) catastrophe bond transaction early, so it can return to the market with a clear view of its risk transfer opportunities.

A meeting to make the decision on whether to call the cat bond early or not had been convened earlier this month, but due to a lack of attendees the board could not make a decision at the time.

The Everglades Re II 2015-1 cat bond was issued in 2015 when the Florida Citizens book of insurance business was much larger, so since then the risk profile of the portfolio it covers has changed significantly, meaning that the older coverage is not perhaps as efficient as before.

Pricing is (of course) another factor.

At issue the Everglades Re II 2015-1 cat bond notes paid investors a 5.15% coupon at issuance, with a 1.31% expected loss. Even after the notes reset this year the expected loss is anticipated to be moved to 1.35%, resulting in a reset coupon of 5.31%.

That is not a good price for the level of expected loss, when you look at how recent catastrophe bonds have priced, meaning Citizens could find it significantly more cost-effective to call these notes, for which there is no penalty charge, and then start from scratch when it makes its 2017 risk transfer and reinsurance purchase in the coming weeks.

By calling the cat bond early Citizens can revisit the risk transfer markets with more flexibility, enabling it to tailor a 2017 program combining reinsurance and capital markets or cat bond risk transfer to its current risk profile, while also taking advantage of current market appetite and pricing trends.

Citizens can call the notes on the 3rd May 2017 without paying any call premium to the cat bond investors as long as the total insured value of its Coastal Account is less than or equal to $68.178 billion.

As at the 31st January the insured value sat at $58.641 billion, so Citizens can call the Everglades Re II 2015-1 cat bond notes at par value and without paying any call premium.

At the re-convened meeting yesterday the board of Florida Citizens unanimously approved the request to call the Everglades Re II Ltd. (Series 2015-1) catastrophe bond early, allowing it to move forwards with its plans for risk transfer in 2017 with that bond liquidated and the ability to gain a clearer view of its reinsurance and cat bond needs.