The latest catastrophe bond from Florida’s Citizens Property Insurance completed at the end of last week, bringing the amount of risk transfer Citizens benefits from in the cat bond market to $1 billion between its two transactions completed to date. After being clearly pleased with the drop in pricing the Everglades Re Ltd. (Series 2013-1) transaction achieved, Citizens board has hailed the savings the current cat bond pricing environment has enabled it to achieve.
Cost is a major factor in Citizens motivation to utilise the cat bond market as part of its reinsurance program. Last years Everglades Re 2012 deal enabled the insurer of last resort to save around $18m compared to placing the $750m of risk in the traditional reinsurance market.
This years Everglades Re 2013 deal has enabled the insurer to save considerably more, with the Everglades Re 2013 tranche of notes pricing over 7% cheaper than last years 2012 deal, despite it having a lower attachment point and thus being a riskier transaction. The board of Citizens said in a March 22nd press release that the completion of the 2013 risk transfer programme, which exceeds $1.75 billion in total, will reduce potential emergency assessments for all Floridians by over $3 billion for the 2013 hurricane season, a 42% reduction in risk from 2012.
That’s a big win for the insurer, who has been under pressure over its potential to have a claims paying shortfall or to be required to level assessments on every Floridian. Citizens has really turned around its financial position in a substantial way and the risk transfer program of the last two years, assisted by capital markets sources of capacity and the cat bonds, has been a big contributor to this successful de-risking.
“Transferring risk through the use of catastrophic reinsurance is an effective means to reduce the likelihood and the amount of assessments that must be paid after a storm,” commented Citizens CFO Sharon Binnun. The catastrophe bond agreements benefit Citizens and private carriers, the press release said, by spreading risk and reducing the demand on traditional reinsurers.
So the completion of Everglades Re 2013 at such an attractive price helps Citizens to tick off a number of objectives. Strengthening its financial position, further diversifying its sources of risk transfer, saving money and providing better value protection to Floridians against assessments.
Citizens Chairman Carlos Lacasa said that Citizens’ groundbreaking $750m Everglades 2012 cat bond last year paved the way for the 2013 transaction, which he said sparked new interest among investors and came at a much lower cost than the previous tranche.
“This action continues Citizens’ goal of transferring risk to the private sector by working closely with nontraditional capital markets, and further protecting our policyholders and all taxpayers in Florida,” Lacasa commented. “Citizens has emerged as an international leader in risk transference and our achievements are being recognized by financial markets around the world.”
Citizens said that the 2013 cat bond notes came in at a final cost to the insurer of 11.08%, a 40% saving over the 2012 transaction which cost the insurer 19.07% all-in. Remember that is the cost to Citizens, not purely the coupon paid to investors, which is 10% for the 2013 deal where as it paid 17.75% in 2012.
According to Citizens, this improved pricing will enable it to save an estimated $60m over the life of the Everglades Re 2013 transaction. The transaction was, as every recent cat bond has been, in demand with investors and was nearly two times oversubscribed. According to Citizens 32 investors participated in the 2013 deal.
CFO Sharon Binnun recognised the team of partners who worked on the Everglades Re 2013 deal with Citizens, highlighting Goldman Sachs role as lead underwriter in helping to make the transaction so successful.
“This transaction both lowered Citizens’ retention from last year and was completed at a cost savings of approximately 40 percent,” said Binnun. “We were also able to accomplish this while increasing the term of the coverage to three years.”
With such a successful cat bond issuance now complete, Citizens will focus on completing the rest of its risk transfer for the 2013 hurricane season. It is expected to complete its traditional reinsurance buying within the next week or so, some of which may also be sources from collateralized reinsurance underwriters backed by investors.
Standard & Poor’s assigned its ‘B’ rating to the single tranche of $250m of cat bond notes issued by Everglades Re Ltd. in the Series 2013-1 issuance.
The single tranche of Series 2013-1 Class A Variable Rate Notes Due 28 March 2016 issued by Everglades Re Ltd. have been admitted for listing on the Bermuda Stock Exchange. Appleby Securities (Bermuda) Ltd. acted as listing sponsor.