Citizens seeks early call for Everglades Re II 2015 cat bond


Florida’s Citizens Property Insurance Corporation wants to call (or redeem) its $300 million Everglades Re II Ltd. (Series 2015-1) catastrophe bond transaction early in order to take advantage of market conditions with any new issue in 2017.

Florida Citizens is set to come back to the catastrophe bond market in 2017 as part of its reinsurance risk transfer renewal.

As has been typical in recent years, Citizens is expected to make use of both the traditional reinsurance market and the capital markets again, but calling the outstanding Everglades Re II cat bond could make a lot of sense given recent market pricing.

Florida Citizens could benefit from re-calling the notes, essentially returning the principal to investors, but then issuing a replacement, perhaps larger cat bond in 2017 as the pricing that could be achieved now may be lower.

The Everglades Re II 2015-1 cat bond notes paid investors a 5.15% coupon at issuance, with a 1.31% expected loss. With an annual reset due in the coming weeks, Citizens said that it would anticipate resetting the notes with an expected loss of 1.35%, resulting in a reset coupon of 5.31% being paid to investors through the next risk period.

That’s a multiple of 3.93 times the expected loss, which when you look at average multiples in the catastrophe bond market over the last year or more is relatively high for the layer of risk ceded to investors.

So Florida Citizens feels it can call these Everglades Re II 2015-1 cat bond notes and issue a new catastrophe bond which would pay investors a lower coupon, and multiple, so reflecting more cost-effective reinsurance protection.

Citizens said it can call the notes on the 3rd May 2017 without paying any call premium to the cat bond investors as long as the total insured value of its Coastal Account is less than or equal to $68.178 billion.

As at the 31st January the insured value sat at $58.641 billion, so Citizens can call the Everglades Re II 2015-1 cat bond notes at par value and without paying any call premium.

By calling the notes the insurer said; “Citizens will have full flexibility to optimize the structure of its 2017 risk transfer program without any existing risk transfer carryover and will be able to take full advantage of current market conditions.”

Florida Citizens has to notify the investors in the notes of its intentions by 29th March 2017. The insurer called a Board meeting for last week to discuss and seek approval for calling the Everglades Re II cat bond, but it’s been reported that there were insufficient board members present from Citizens to approve the measure and so no decision has yet been taken.

It’s expected that Florida Citizens will reschedule the meeting and seek approval to call the Everglades Re II Ltd. (Series 2015-1) catastrophe bond in the coming days.

With recent cat bond issues achieving very attractive pricing, it seems likely Citizens could better the spread its currently paying for coverage under the Everglades Re II 2015 cat bond.

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