Everglades Re II Ltd. (Series 2020-2)

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Everglades Re II Ltd. (Series 2020-2) – At a glance:

  • Issuer: Everglades Re II Ltd.
  • Cedent / sponsor: Citizens Property Insurance
  • Placement / structuring agent/s: Citigroup is sole structuring agent and joint bookrunner. BofA Securities is joint bookrunner.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / perils covered: Florida named storms
  • Size: $110m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: May 2020

Everglades Re II Ltd. (Series 2020-2) – Full details:

This will be the seventh catastrophe bond issuance to be sponsored by the state of Florida’s Citizens Property Insurance Corporation, the not for profit insurer for property owners that cannot find coverage in the private market.

With this Everglades Re II Ltd. Series 2020-1 and Series 2020-2 transaction, two series of notes will be offered to cat bond investors as Florida Citizens seeks capital markets backed reinsurance to cover some of its coastal account risks and for the first time some of the risks in its personal lines account as well.

Of the current $300 million target, Florida Citizens is seeking $200 million of reinsurance for its coastal account tower, with the other $100 million for the personal lines account.

Both cat bond series will sit alongside traditional sources of reinsurance spanning some $900 million of its two reinsurance towers, so the chances of this issuance upsizing are set to come down to pricing and how the capital market compares to the traditional market.

As we’ve seen before, if catastrophe bond market pricing is deemed conducive, Citizens has significantly upsized on its cat bond issues. So it will be interesting to see how this new arrangement fares, given cat bond market returns have clearly risen but reinsurance renewal rates for Florida are expected to rise too.

Everglades Re II Ltd. will seek to two tranches of notes, Series 2020-1 Class A and Series 2020-2 Class A notes, with both set to provide Florida Citizens with annual aggregate reinsurance coverage based on an indemnity trigger, across a three-year term.

The reinsurance protection will be against named storm losses affecting the state of Florida where all of Citizens policies are located.

The Series 2020-1 Class A tranche of notes currently target $200 million of reinsurance protection covering Citizens coastal account subject business, from an attachment point of $1.446 billion of losses across a to-be-defined share of a $900 million layer of the tower, giving the notes an initial expected loss of 1.93%. These notes are offered with price guidance of 5.75% to 6.5%.

While the Series 2020-2 Class A tranche of notes target $100 million of reinsurance protection for Citizens personal lines account tower, attaching at $1.641 billion of losses across a $637 million layer, giving the notes an initial expected loss of 1.22%. These notes are offered with price guidance of 4.75% to 5.5%.

Update 1:

The sizes of the tranches haven’t changed at this time, but our sources said that pricing has increased considerably.

The Series 2020-1 Class A tranche of notes continues to target $200 million of reinsurance protection covering Citizens coastal account subject business. These notes have an initial expected loss of 1.93% and were at first offered with price guidance of 5.75% to 6.5%.

We’re told that the coupon price guidance has now been elevated to 7.25% for this tranche, a 12% increase from the top-end of original guidance, or a huge 18% from the initial mid-point.

While the Series 2020-2 Class A tranche of notes still targets $100 million of reinsurance protection for Citizens personal lines account tower. This tranche of notes has an initial expected loss of 1.22% and were first offered with price guidance of 4.75% to 5.5%.

Now, the coupon price guidance for this tranche has leapt to 6.25%, reflecting a 14% increase from the top-end of initial guidance and a huge 22% from the initial mid-point.

These are the biggest price increases seen in the catastrophe bond market so far this year and a clear demonstration of ILS fund and investors demand for higher pricing at the upcoming reinsurance renewals.

Update 2:

Florida Citizens opted to withdraw the $200 million Series 2020-1 Class A tranche of notes that would have provided reinsurance to its Coastal Account tower.

It’s assumed this was a reaction to Florida reinsurance market conditions, where rates have been firming as the renewal approached.

The remaining $100 million of Everglades Re II Series 2020-2 Class A notes will provide aggregate reinsurance protection for Florida Citizens personal lines account tower.

The pricing for this layer of notes has now been fixed at the top-end of the revised guidance at 6.25%, which represents a roughly 22% increase from the mid-point of the initial marketed guidance range.

CFO Jennifer Montero told us that this was a direct reaction to what is seen as irrational pricing in the reinsurance and capital markets, making single-year traditional reinsurance a better option for the Coastal Account at this 2020 renewal.

Update 3:

Florida Citizens opted to upsize the remaining Personal Lines Account layer of the catastrophe bond issue by 10%, to reach $110 million.

The pricing remained fixed at 6.25%.

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