On Wednesday we covered the new catastrophe bond transaction which has come to market on behalf of Florida’s Citizens Property Insurance, the state backed property insurer of last resort. Citizens second cat bond issuance, after its successful and record-sized 2012 issuance, Everglades Re Ltd. (Series 2013-1) sees the insurer seeking to expand the amount of reinsurance protection that it receives from capital markets sources.
We have some further details on the transaction for you today, thanks to information gleaned from the rating agency pre-sale report and sources in the market. After the success of Citizens Everglades Re 2012 cat bond, this 2013 edition is sure to be closely watched by the ILS market and observers and it will test the ILS investor market appetite for one of the reinsurance sectors peak risks.
The transaction will see Everglades Re Ltd., a Bermudian special purpose insurer, enter into a reinsurance agreement with Citizens, which it will collateralize through the sale of catastrophe bond notes in this Series 2013-1 issuance. This gives Citizens a multi-year source of collateralized excess of loss reinsurance cover, via the capital markets, on a per-occurrence and indemnity triggered basis over a three-year deal term.
The protection Everglades Re 2013 will provide to Citizens is for its most exposed business segment, what is known as the Coastal Account. The transaction covers both personal residential and commercial residential business within Citizens Coastal Account.
As we said in our article revealing this deal two days ago, the 2013 deal is higher risk than last years Everglades Re cat bond, attaching at a lower level of indemnity losses. The initial attachment point is set at $5.139 billion of indemnity losses to Citizens and the initial exhaustion point is $5.389 billion. For reference the 2012 deal attached at $6.35 billion.
We’re told that the initial attachment probability for these cat bond notes is 2.91%, the initial exhaustion probability is 2.73% and the initial expected loss is 2.80%. The notes will be subject to two annual resets at the end of each year risk period, during the three-year term. At each reset the attachment point will be kept within a range between 3.00% and 2.75%.
A historical event loss analysis was undertaken by risk modeller for the transaction AIR Worldwide. The analysis found that three events since 1900, the no-name storm of 1926 that made landfall in Florida, 1992’s Hurricane Andrew, and the no-name storm of 1947 that made landfall in Florida and Louisiana, would have resulted in a loss to note holders. The first two events would have resulted in a full loss of principal on the notes, and the third event a 93% loss of principal to investors. Other events would have caused indemnity losses to Citizens but would not have reached the attachment point of $5.139 billion.
Standard & Poor’s pre-sale report contains a very interesting graphic which shows exactly how the Everglades Re 2013-1 cat bond slots into Citizens Coastal Account coverage. As you can see from the image below, this 2013 cat bond comes into play before last years 2012 deal, attaching at a lower level in the stack. It also shows that before the Everglades 2013-1 cat bond faces a loss, Citizens has to exhaust its Florida Hurricane Catastrophe Fund coverage and much of its private reinsurance protection.
The Everglades Re 2013-1 cat bond is being brought to market with the help of Goldman Sachs, who are acting as structuring agent and bookrunner. Loop Capital Markets are co-manager on the deal, as they were on the Everglades 2012 issuance. AIR Worldwide are the risk modelling firm and reset agent on the transaction.
The collateral from the sale of the cat bond notes is being invested in U.S. Treasury money-market funds and held within reinsurance trust accounts.
Yesterday we said the expected coupon would be around 12% but it transpires that it is being marketed with a coupon range of 11% to 12% above the return of the money-market funds. That is considerably lower than the coupon paid on the 2012 issuance (17.75%) which was also less risky, so this really is a test of the ILS investment markets appetite for Florida hurricane risk and it will be interesting to watch which way pricing goes.
We will keep you updated as the transaction comes to market.