From a sponsors perspective, be that an insurer, reinsurer or perhaps even a corporate sponsor, there are many beneficial features to the catastrophe bond. They can be structured to closely complement existing sources of reinsurance or retrocessional cover, they can provide capacity where it perhaps was not available through the traditional reinsurance markets and they can even sometimes be cheaper than the reinsurance market or other alternatives.
For some sponsors, particularly those with large reinsurance programs covering peak catastrophe zones, the feature that is perhaps most important, is the ability to attract new and diverse sources of reinsurance capacity supporting capital. As a security instrument, a catastrophe bond appeals to different capital providers than the opportunity to participate in a traditional reinsurance program, even on a collateralized basis. This benefit can be overlooked but for some sponsors is of great importance as it adds significant value.
Florida’s Citizens Property Insurance, the property insurer of last resort in the sunshine state, is one of those who now enjoys this beneficial feature of a catastrophe bond. Earlier this year, Florida Citizens became a cat bond sponsor and issued their first cat bond deal, the record sized $750m Everglades Re Ltd. This transaction signalled a change in Citizens risk transfer strategy, and perhaps a coming of age for the cat bond market, as capital market reinsurance capacity was thrust into the limelight when one of the world’s most high-profile insurers (in column inch terms) chose a cat bond for the first time.
One of the benefits of tapping the capital markets was certainly price, as Florida Citizens said that the cost of the Everglades Re cat bond was cheaper than the reinsurance rate Citizens had paid in the traditional market a year earlier. Another benefit was the ability to secure more capacity than was originally budgeted for, Citizens had been aiming for $750m of risk transfer with up to $250m coming from a cat bond or alternative reinsurance market sources. In the end Citizens secured the $750m from Everglades Re and added another $750m of traditional reinsurance cover to the program, doubling their budgeted risk transfer for the year.
Florida Citizens said that 32 investors participated in the Everglades Re cat bond and this gave them access to a diverse source of capital to augment their traditional reinsurance capacity sources. Just how much that added to their capital sources was unknown until recently when Sharon Binnun, Florida Citizens CFO, said that of the 32 investors, 30 of them were not participants in the traditional reinsurance space. So this means that Citizens have broadened their reach considerably in their search for risk transfer capacity by utilising a cat bond over traditional reinsurance. This could have made the difference in allowing Citizens to double its budgeted capacity and add extra risk transfer to its program, something that many observers have been calling for Citizens to do for years.
We asked Sharon Binnun for her thoughts on the 30 new investors in Florida Citizens catastrophe risk. She said that the 30 “Represented new capital to assume a portion of Citizens’ cat risk”. For a sponsor like Florida Citizens it cannot be stressed enough how important this new source of capital could prove to be in the coming years should they choose to repeat the Everglades Re cat bond.
We asked Sharon why she felt investors were so keen on Everglades Re, and what helped to make this cat bond transaction so successful for Citizens; “I think Citizens’ represented an opportunity to expand the capital risk transfer space and it seems that we were able to demonstrate to investors that this is a suitable risk for them. The success in Everglades Re was due to: the willingness of the investor base to thoroughly consider Citizens as a cedant, the talent at Goldman Sachs as Underwriter, Raymond James as FA, AIR as the modeling firm and the commitment of Citizens’ Board to support this important transaction. ”
This is a further sign of the convergence of reinsurance and the capital markets and shows that by using capital market risk transfer instruments such as cat bonds and ILS, sponsors can tap into new sources of capital which may have been hidden from them previously. By carefully structuring reinsurance programs, using traditional and non-traditional coverage options, sponsors now have the ability to expand their risk transfer capacity sources outside of those they have typically been used to relying on. This ability is one of the key factors that will help the cat bond market to continue to provide a sustainable complementary alternative to the traditional reinsurance markets.
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