Everglades Re Ltd. (Series 2013-1)

Florida Citizens second catastrophe bond issuance under Bermuda domiciled SPI Everglades Re Ltd.

Everglades Re 2013 seeks to secure another layer of reinsurance protection to Citizens from the capital markets. The transaction will provide Citizens with a source of collateralized reinsurance capacity for hurricanes on a per-occurrence basis using an indemnity trigger over a three year risk period.

The transaction will see Everglades Re Ltd., a Bermudian special purpose insurer, enter into a reinsurance agreement with Citizens, which it will collateralize through the sale of catastrophe bond notes in this Series 2013-1 issuance.

We’re told by sources that the transaction has an initial size of $250m and that it covers Florida hurricane risks from within the Citizens coastal account segment, the same segment of its insurance program as last years Everglades Re 2012 cat bond provided reinsurance for. The transaction covers both personal residential and commercial residential business within Citizens Coastal Account.

This second Everglades Re cat bond covers a slightly higher risk tranche of Citizens coastal account than the first deal and as such has a slightly higher probability of attachment.

The initial attachment point for Everglades Re 2013 is just $5.139 billion of indemnity losses to Citizens and the initial exhaustion point is $5.389 billion, hence the $250m size of this deal. The attachment point is a good deal lower than last years Everglades Re 2012 transaction, which attached at $6.35 billion, so this 2013 issuance is more risky. This means that this new 2013 cat bond layer would attach before last years cat bond were a major hurricane to impact Florida and create losses above the indemnity attachment point.

The initial attachment probability for these cat bond notes is 2.91%, the initial exhaustion probability is 2.73% and the initial expected loss is 2.80%. The notes will be subject to two annual resets at the end of each year risk period, during the three-year term. At each reset the attachment point will be kept within a range between 3.00% and 2.75%.

As you can see from the image below, this 2013 cat bond comes into play before last years 2012 deal, attaching at a lower level in the stack. It also shows that before the Everglades 2013-1 cat bond faces a loss, Citizens has to exhaust its Florida Hurricane Catastrophe Fund coverage and much of its private reinsurance protection.

A historical event loss analysis was undertaken by risk modeller for the transaction AIR Worldwide. The analysis found that three events since 1900, the no-name storm of 1926 that made landfall in Florida, 1992′s Hurricane Andrew, and the no-name storm of 1947 that made landfall in Florida and Louisiana, would have resulted in a loss to note holders. The first two events would have resulted in a full loss of principal on the notes, and the third event a 93% loss of principal to investors. Other events would have caused indemnity losses to Citizens but would not have reached the attachment point of $5.139 billion.

The collateral from the sale of the cat bond notes is being invested in U.S. Treasury money-market funds and held within reinsurance trust accounts.

The Everglades Re 2013 cat bond is being marketed with a much lower coupon than last years cat bond. Last years Everglades Re cat bond priced at 17.75% but we understand that this years is marketing with a range of 11% – 12%.

Standard & Poor’s have assigned the single tranche of Everglades Re Series 2013-1 cat bond notes a preliminary rating of ‘B’.

Update: Everglades Re 2013-1 priced at a reduced coupon of just 10%. Citizens said that this equates to an all-in cost to the insurer of about 11.5%. This represents a significant saving to the insurer and for this riskier tranche of notes than last years Everglades cat bond a reduction of 7.75% in coupon payment.

Update: Citizens has hailed a cost-saving of as much as 40% from its latest transaction. It believes it may save as much as $60m over the lifetime of the transaction.

“This transaction both lowered Citizens’ retention from last year and was completed at a cost savings of approximately 40 percent,” said CFO Sharon Binnun. “We were also able to accomplish this while increasing the term of the coverage to three years.”