Florida’s Citizens Property Insurance Corporation has reset its most catastrophe bond, the $300m Everglades Re II Ltd. (Series 2015-1) transaction, at a lower attachment point, reacting to the effects of depopulation of its portfolio and looking ahead to its reinsurance and risk transfer needs.
One of the benefits of the variable reset feature of catastrophe bonds is that sponsors, such as Florida Citizens, can adjust the precise layer of risk covered, effectively where the reinsurance kicks in, for a given cat bond by moving the attachment point, resulting in a change of the bonds expected loss, and also the coupon paid to investors.
This flexibility is particularly useful given the catastrophe bond’s multi-year coverage. It means that for Florida Citizens, with a reinsurance renewal approaching and hurricane season just weeks away, the in-force Everglades Re II 2015 cat bond can be adjusted to suit its coverage needs, based on expectations for the renewal and how much coverage can be acquired at what level in the risk tower.
It also means that Florida Citizens can adjust its catastrophe bond provided reinsurance cover accordingly to account for changes to its portfolio due to the depopulation program, where policies underwritten by Citizens are passed into the private insurance market.
Rating agency Standard & Poor’s explained in a note that the Everglades Re II 2015 variable reset allows for an adjustment of the cat bond as long as the expected loss remains within between a range of 1.21% and 1.41%.
When this Everglades Re II cat bond launched, the initial attachment probability and expected loss were 1.46% and 1.31%, respectively. But after this reset and for the next annual risk period they have been shifted upwards to 1.50% and 1.33%, respectively, reflecting an increase in the riskiness of the cat bond.
As a result of the increased probability of attachment and expected loss investors stand to earn a slightly higher coupon, with the interest risk spread increased for the next risk period to 5.23% from the initial 5.15%, S&P explained.
S&P also noted the changes in attachment point and exhaustion point for Florida Citizens catastrophe bond.
The initial attachment and exhaustion were $6.256 billion and $7.05 billion, but after the reset these have been updated to $4.27 billion and $5.03 billion, respectively. As a result, the insurance percentage of this cat bond, which is the percentage between attachment and exhaustion covered by the notes, increased slightly from 37.7834% to 39.4737%.
S&P explains that the changes in attachment and exhaustion are; “due to the depopulation program whereby a significant amount of the residential properties that until now were insured by Citizens Property Insurance Corp. have been renewed into take-out companies as well as commercial-residential exposures moving over to the traditional insurance market.”
We would make the assumption that the 2016 reinsurance renewal is also a factor in Citizens decision, as it looks holistically at the insurance risk it carries and arranges its risk transfer needs to ensure it is ready for the 2016 hurricane season.