Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Everglades Re Ltd. upsizes to $750m, becomes largest catastrophe bond ever


Clearly catastrophe bond and insurance-linked securities people don’t rest at the weekends. Over the last couple of days we’ve had a number of excited emails and phone calls from participants in the market telling us that the Everglades Re Ltd. cat bond has more than tripled in size during marketing to become a massive $750m offering. If the deal achieves this size at closing it will become the largest cat bond ever to hit the market and a huge first time offering for Florida’s Citizens Property Insurance.

Everglades Re was launched as a $200m cat bond, and while it was always expected to upsize to some degree as Florida Citizens had budgeted for $250m of alternative risk transfer as part of their overall reinsurance program for this year, it had never been thought possible that we’d see the deal grow by this much. If the deal does indeed complete at $750m it will provide Florida Citizens with up to 75% of their expected $1 billion of reinsurance cover that their recent budget forecast they would buy.

That would be huge news for the ILS and cat bond space and would likely mean that the price of placing the risk in the cat bond market was too attractive for Citizens to ignore and hence their traditional reinsurance cover would shrink this year. It is also possible that they may have opted for the $750m of cover now, fixing the price over the expected two-year term of the cat bond and actually have expanded their risk transfer as pricing was attractive. Whatever the reason, if this deal does in fact close at $750m it will be extremely positive for the cat bond market.

We’re told that the while the deal has grown the geographic cover hasn’t changed for Everglades Re, it will still provide indemnity cover on a per occurrence basis for covered business within Citizens personal and commercial residential coastal property account. At this stage it’s not clear whether the attachment and exhaustion points have been adjusted.

Everglades Re Ltd. promises to pay investors a very good return for taking on some of Citizens hurricane risk. It was expected to pay 16.5% to 18% above Treasury Money Market Fund returns and we’re told that it’s likely to complete with a coupon at the higher end of that range at 17.75%. That coupon certainly goes some way towards explaining the increase in size and signifies that investors are really hunting for attractive returns even if the risks are perceived as higher.

If Everglades Re completes at $750m in size it will become the largest catastrophe bond in the history of the market, for a single tranche, single peril cat bond to hit $750m is unprecedented in the history of the ILS market. The only single insurance-linked security to come close (that we have in our Deal Directory) would be Swiss Re’s $705m Vita Capital III Ltd. mortality catastrophe bond. The largest single natural catastrophe bond we have in the directory is Residential Reinsurance 2007 Ltd. which completed at $600m. Swiss Re’s first Successor cat bond deals in 2006 achieved $950m but were actually issued through a number of different individual transactions.

For a single tranche, Florida wind cat bond to reach $750m in size is groundbreaking enough on its own. The fact that the sponsor of the largest cat bond ever is Florida Citizens, a first time sponsor and State backed insurer, makes this even more important for the sector. The fact that Florida Citizens has managed to upsize this deal so much, we’re not sure any cat bonds have more than tripled in size before, is also important as it shows that demand from investors is very strong and pricing must have seemed very attractive (or at least competitive to reinsurance) to Citizens.

We’ll have to wait for the deal to officially complete before its size can be 100% confirmed, however sources have told us that the bookrunner Goldman Sachs reported that $750m of notes are now being offered by Everglades Re Ltd. in their latest communication on the transaction. We’ll update you as Everglades Re comes to market.

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