As expected Florida’s Citizens Property Insurance is back in the catastrophe bond market with the launch of Everglades Re Ltd. (Series 2014-1), a $400m (for now) annual aggregate Florida hurricane catastrophe bond.
As written about here on Artemis a few weeks ago, Florida Citizens had been actively speaking with investors in the insurance-linked securities space, as well as with other fixed income investors, about a potential new cat bond issuance for a number of weeks to gauge investor appetite for this cat bond.
With Citizens record $750m Everglades Re Ltd. (Series 2012-1) deal, the largest single tranche of catastrophe bond notes issued in cat bond market history, due to mature on the 30th April 2014, this new Everglades Re issuance will replace some of that cover.
One of the key differences between the maturing Everglades Re 2012-1 and the new Everglades Re 2014-1 is that the maturing $750m of notes provide per-occurrence protection to Florida Citizens while the new cat bond will provide aggregate protection, so cover a number of storms which between them could add up to enough losses to reach the trigger point.
Some might say this makes the deal a more risky proposition, but over the course of a deal that will depend on exactly how the hurricane season pans out. An active hurricane season with multiple hurricanes hitting Florida is the risk covered by this cat bond, where as the 2012 deal only protected Citizens against one large event.
So it looks like Florida Citizens has learned more about where it really requires capital market protection, hence the new aggregate structure of Everglades Re 2014-1, which we understand will sit in a layer above the other Everglades cat bond, Everglades Re Ltd. (Series 2013-1). This is the same layer where the 2012 transaction triggered, we understand.
So 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)’.
Citigroup is acting as sole structuring agent and bookrunner and BofA Merrill Lynch is a joint bookrunner. Risk modelling is being provided by AIR Worldwide.
It’s going to be fascinating to see what appetite there is for Florida Citizens third cat bond deal. It’s certain to get completed but at what size and what pricing will be very telling of the ILS markets appetite for risk as well as what type of investors are ultimately providing most of the backing for this cat bond
We will keep you updated as more information about the Everglades Re Ltd. (Series 2014-1) emerges and is the deal progresses to market. You can read all about this transaction and every other catastrophe bond in the Artemis Deal Directory.