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$1.5bn Everglades Re 2014 cat bond upgraded as attachment drops


The issue credit rating on Florida’s Citizens Property Insurance Corporation’s $1.5 billion Everglades Re Ltd. (Series 2014-1) catastrophe bond has been increased after the cat bond was reset at a lower attachment point and the lowest attachment probability.

As Florida Citizens depopulation has progressed, resulting in it holding perhaps the lowest level of Florida hurricane exposed property risk in recent history, its coverage needs have changed and thanks to the flexibility of the cat bond variable reset the insurer has been able to ensure its capital markets risk transfer remains as effective as possible.

The Everglades Re 2014 catastrophe bond, which still remains the largest single cat bond issuance that the ILS market has ever seen, began life with an attachment point of $5.202 billion which resulted in an initial attachment probability for the notes of 2.89%.

At the recent annual reset, which is the last for this Everglades Re 2014 cat bond as it matures next year, Florida Citizens elected to drop the attachment probability right down to the lowest end of the permitted range, the variable reset terms allows 2.74% to 3.04% and the bond has been reset for the final risk period with an attachment probability of 2.74%.

As a result of this the Everglades Re 2014 cat bond now attaches at $2.779 billion and exhausts at $5.279 billion, significantly lower than the initial launch levels. At the same time the risk interest spread has now been updated to 7.11% for the final risk period, so lower than the 7.5% the cat bond paid at launch in 2014.

As a result of the changes, the lower probability of attachment implying a lower risk despite the much lower attachment point, S&P Global Ratings explained that it has raised its issue credit rating on Everglades Re Ltd.’s Series 2014-1 notes to ‘B+(sf)’ from ‘B(sf)’.

The downsizing of Citizens portfolio of risk means that this Everglades 2014 cat bond is essentially less risky, despite the much lower attachment point. The flexibility of the variable reset has enabled Citizens to benefit from this, while at the same time ensuring investors in the cat bond remain appropriately compensated.

Citizens recently also reset its Everglades Re II Ltd. (Series 2015-1) cat bond transaction in a similar manner, enabling the coverage to drop down into its reinsurance tower in the most appropriate way to suit its greatly de-risked covered portfolio of business.

The resets have also enabled Citizens to make sure that its $1.8 billion of in-force catastrophe bond coverage worked optimally with its 2016 reinsurance renewal, as it shifted its coverage focus to a per-occurrence structure.

For 2016 the catastrophe bonds will now sit in a layer alongside each other, with the Everglades Re 2014 providing the lions share of that layer and the 2015 deal augmenting it.

Citizens use of the catastrophe bonds variable reset provides a good example of why this structural feature is important and why it has become a staple feature of every cat bond issued today. This flexibility is vital to enable reinsurance to be bought more intelligently, for in-force cat bonds to fit well within a changing reinsurance tower and for the coverage afforded to be flexible and meet the changing needs of an insurer as its covered subject business portfolio adjusts.

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