According to sources the price guidance for Florida’s Citizens latest Everglades Re II Ltd. (Series 2015-1) catastrophe bond has been expanded, providing a wider range of possible coupon yield after investors pushed back on the tight launch pricing range.
When the $250m Everglades Re II cat bond was launched last week the single tranche of Class A notes came with price guidance of 4% to 4.5%, as Citizens sought to expand its capital markets reinsurance cover.
We understand that the price range has now been expanded, providing investors more room to indicate interest at a higher coupon, with a new guidance range indicating a potential yield from 4% to 5.25%.
The addition of .75% at the top end of the range will give investors more room to show interest at higher coupons, which according to investors we’ve spoken with was already happening. One source said the original pricing was considered too low for the risks involved in a Citizens coastal account cat bond deal.
With an expected loss of 1.31% at the base case and 1.55% on a sensitivity case basis, the initial launch pricing looked aligned with recent multiples, a 3.2x multiple at the mid-point using the base case EL, or a 2.7x multiple using the sensitivity case.
However when you consider that the underlying book of insured business, being ceded by Florida Citizens in this Everglades Re II transaction, is considered some of the most hurricane exposed property in the United States, it is easy to see why investors may have pushed back seeking a higher coupon.
One investor told Artemis that the underlying property business is some of the riskier within Citizens portfolio due to location and construction type. A reasonable proportion of the personal properties included in the deal are wood frame based, which are considered among the riskiest and in terms of location much of the property is located on a barrier island or in the most hurricane prone areas (which is to be expected of a Citizens deal).
A number of investors we spoke with said they felt the initial price range was too low, but expressed interest in the deal within the new price range. That bodes well for this Everglades Re II cat bond being a success.
At the mid-point of the new price guidance range, which would be 4.625%, the multiple at the base expected loss would be 3.5x and at the sensitivity case 3x. That still might be considered too low by investors for these particular risks, so the pricing could move towards the upper end before completion of the deal.
It’s encouraging to see market discipline at work in recent catastrophe bond deals. Allstate’s latest cat bond Sanders Re 2015-1 has disappeared from the market without being completed after investors pushed back on the issuance on the basis of the 7 year term and pricing that was considered too low.
Now, Florida Citizens latest Everglades Re II cat bond has also resulted in investor push-back, but sensibly Citizens is continuing with the issue, simply offering a higher coupon to investors if they felt the original was too low. Even at the upper end of the new guidance it seems like good value protection when you consider the prices paid for previous Everglades cat bonds.
Of course it does beg the question, who set the initial price expectations? And how does the pricing compare to traditional reinsurance alternatives?
It seems that either someone thought the Florida property catastrophe market is softer than reality dictates, or someone was trying to push the pricing down to new lows. Again, it’s encouraging to see investors pushing back when rates get below their expectations.
So the Everglades Re II Ltd. (Series 2015-1) catastrophe bond remains in the market, but with newly expanded price guidance of 4% to 5.25%. The deal remains sized at $250m at the moment and no other changes have been made at this time.
We’ll keep you updated as the transaction comes to market and you can read all about it in the Artemis Deal Directory.