The latest catastrophe bond from Florida’s Citizens Property Insurance, Everglades Re Ltd. (Series 2014-1), is set to become the largest single cat bond transaction ever having increased in size by a stunning 213% to reach $1.25 billion, according to sources.
Update: Everglades Re 2014-1 grew again since this article was published to hit $1.5 billion in size.
The Everglades Re 2014-1 cat bond launched at $400m in size just two weeks ago. The launch of the cat bond was expected as Florida Citizens had been actively testing investors appetite to support another cat bond issue in the weeks prior to that. The cat bond launched seeking the $400m of cover for Florida hurricanes on an indemnity and annual aggregate basis.
It’s not a surprise that this deal has increased in size. It is replacing the maturing $750m Everglades Re Ltd. (Series 2012-1), so there was always a good chance that Citizens would choose to cover that whole layer again, but to increase to $1.25 billion was perhaps a little unexpected.
If a clear demonstration of the continued appetite for catastrophe risk among capital markets investors were needed this is it. For a Florida wind only cat bond to grow to this size when the market is already so exposed to that peril, particularly an aggregate cat bond like Everglades Re 2014-1, it shows significant pent-up demand to deploy capital. Once again this should demonstrate to any potential cat bond sponsors sitting on the sidelines that there has perhaps never been a better time to bring a new cat bond deal to market.
The growth of this cat bond to a record $1.25 billion shows that Florida Citizens is now so comfortable with the capital market as a source of risk capital that it is willing to secure a significant amount of its protection from a catastrophe bond issue. In 2013 Florida Citizens had $1.851 billion of private reinsurance cover in place, with collateralized covers providing just over 73% of that.
At that time $1 billion was sourced from catastrophe bond issues. With Everglades 2012 maturing, Citizens will now be left with $1.5 billion of reinsurance cover from its two remaining catastrophe bond deals, once this transaction has closed. With Citizens overall level of exposure declining due to depopulation of policies and the clearinghouse efforts, it is likely that the majority of its reinsurance protection in 2014 will be sourced through the Everglades 2013 and 2014 catastrophe bonds.
We understand that while the Everglades Re 2014-1 cat bond deal has upsized to $1.25 billion the pricing has not followed the lead of almost every other cat bond in 2014 by dropping to below the launch guidance range.
The Everglades Re 2014-1 cat bond launched with a wide coupon range of 6.5% to 7.75%. The latest pricing guidance for the now $1.25 billion of cat bond notes has narrowed to 7.25% to 7.5%, we understand. So if the deal prices at 7.25% it would be just above the mid-point of the launch guidance, or at 7.5% it would actually be slightly more towards the upper end of the launch guidance.
This suggests a level of investor discipline in the acceptance of this cat bond, as while investors have shown an appetite to make a significant investment in Florida hurricane risk with Everglades Re 2014-1, the investor community has not done so at any price.
The investor mix in this cat bond would be interesting to see as we understand that it was marketed to fixed income investors, some of whom are not typical ILS specialist investors. This was also the case with the previous Everglades cat bonds, which both saw some involvement from fixed income players from outside the ILS space.
The marketing of Everglades Re 2014-1 finishes later this week we understand and the completion of the deal is now expected at the beginning of May. This $1.25 billion catastrophe bond will help the second-quarter issuance total reach very healthy levels indeed, considering that even now it has reached approximately $2.15 billion already with the help of this transaction.
The successful completion of this cat bond at the start of May at $1.25 billion in size (or perhaps even more) will send a clear message that the ILS market is keen for more risk in securitized form and that it is willing to support ever larger issues at very attractive pricing. That should encourage regular issuers to continue to utilise the cat bond market for even larger covers and help to give new sponsors the encouragement to take their first steps into ILS.
Q1 2014 Catastrophe Bond & ILS Market Report – A Record Quarter
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the first-quarter of 2014, looking at the new risk capital issued and the composition of the transactions completed during Q1 2014. Download your copy here.