Yesterday we broke the news that Florida’s Citizens Property Insurance, the state backed provider of property insurance, was bringing its first catastrophe bond to market through a newly established Bermuda special purpose insurer named Everglades Re Ltd. This transaction has been expected since January when it emerged that Florida Citizens was considering the capital markets for a portion of their reinsurance cover this year. Now we have much more detail on the transaction, its participants and structure for you.
Through this cat bond transaction Florida Citizens are seeking to secure a fully collateralized source of indemnity cover via an excess of loss reinsurance agreement for some of their coastal account portfolio of risk on a per-occurrence basis. The deal is being marketed as $200m in size, although we do know that Citizens set aside up to $250m for alternative risk transfer in their budget. The transactions duration will be for two years of cover.
The transaction will provide cover specifically for both personal and commercial residential properties within Citizens Coastal Account. The coastal account is mostly made up of wind only policies for properties along or near the Florida coastline. Clearly this is where Citizens greatest exposure lies so by issuing a cat bond for this chunk of their portfolio they are gaining cover for some of the higher risk layer of their coastal portfolio.
Losses will be based on the ultimate net loss of Citizens from hurricanes in the state of Florida on a per-occurrence basis. The notes will provide cover for losses from an attachment point of $6.35 billion up to an exhaustion point of $7.35 billion. Having such a high level of attachment for a cat bond was always going to be the case for Citizens as they have the Florida Hurricane Catastrophe Fund to rely on for losses beneath that level. With the Everglades Re deal Citizens are basically taking a chunk of their traditional reinsurance cover and passing that on to the capital markets rather than extending their cover to reduce potential surcharges on consumers (something that is likely to cause debate in some quarters). The initial probability of attachment and expected loss for the notes are 2.71% and 2.53% while the initial probability of exhaustion is 2.40%.
Goldman Sachs are acting as structuring agent and bookrunner for the Everglades Re catastrophe bond. Interestingly this deal is using Loop Capital Markets LLC as a co-manager, a firm we haven’t heard of having involvement in cat bond transactions previously.
AIR Worldwide are risk modeller on the transaction. Their analysis shows that hurricane Andrew in 1992 would have caused a full loss of principal to the notes and an unnamed storm in 1926 would also have resulted in a total loss. There are a number of other historical hurricanes which would have caused a partial loss to this cat bond.
Collateral is being handled using a trust account into which the proceeds of the sale of the notes will be entered. The proceeds will then be invested in highly rated Treasury money market funds.
We’re told that the notes are expected to pay an interest coupon in the range of 16.5% to 18% about Treasury money market fund rates, which should be sufficient to make this deal attractive to investors. It does hold more risk than some other cat bonds but investors will likely be willing to assume some of that if they are well compensated.
Standard & Poor’s have given Everglades Re Ltd’s single tranche of Series 2012-1 Class A notes a preliminary rating of ‘B+’.
Everglades Re Ltd. has been established in Bermuda as a shelf programme allowing Florida Citizens to issue further series of cat bond notes should they choose to in future.
We’ll bring you more details on this cat bond as it comes to market.