The wave of nonprofit residual market insurers coming to market with catastrophe bond issuances appears to be cresting with the biggest name yet. According to Bermuda-based risk management blog Artemis.bm, Florida’s Citizens Property Insurance Corp. is preparing a $250 million issuance through an entity called Everglades Re Ltd.
The deal would mark the first foray into the cat bond market for Florida Citizens, ostensibly the state’s insurer-of-last resort, although it has grown to become the largest homeowners insurer in the state (and one of the largest in the country.) Artemis broke the story that the Everglades Re special purpose vehicle was registered in Bermuda March 9, and that the entity is looking to issue $200 million of bonds in a single tranche, although that offer could be upsized.
That’s what happened recently with Pelican Re Ltd., the first-ever cat bond placed by Louisiana Citizens Property Insurance Corp. Originally marketed as a $100 million deal, the offering ultimately grew to $125 million in coverage, which would be triggered should Louisiana Citizens suffer more than $200 million losses. Artemis reported that the deal, which has not been rated by the major credit rating agencies, is possibly the riskiest cat bond to date, with a 4.74% probability of attachment and expected losses of 3.25%. To attract buyers, Pelican Re is offering a coupon of 13.75% above money market fund returns.
Louisiana Citizens could certainly stand to restock its coffers. The insurer has been ordered to pay $104 million to a group of policyholders who protested that their claims from hurricanes Katrina and Rita in 2005 were not paid promptly. Having lost at all previous levels, that judgment may ultimately be appealed to the U.S. Supreme Court. In the meantime, the state Legislature has been considering a series of bills that exempt the insurer (potentially, retroactively) from class action suits and bond-posting requirements and grant it greater leeway with respect to claim-settlement failures.
Its Floridian counterpart, meanwhile, needs to consider alternative capital structures in light of legislation passed last month to strip Citizens of its power to levy “regular assessments” on most of the state’s private property insurers in the wake of a storm. Artemis noted the cat bond deal would have to be just a first step, if Citizens really wants to put its financial house in order:
This move by Florida Citizens to issue a cat bond and tap the capital markets for reinsurance cover will please many who have been highlighting the potential shortfall that Citizens would face after an active hurricane season. $200m of cover won’t be enough to cover the potential shortfall that could be caused if a number of hurricanes hit Florida, but by proving the appetite of the capital markets to take on their risk now Citizens may issue more cat bonds in future.
Meanwhile, an April 2 notice sent to members of the Florida Insurance Council noted that the Florida Hurricane Catastrophe Fund is, itself, considering a $1 billion to $3 billion pre-event financing program for the 2012 hurricane season, which could include an “innovative” private reinsurance program. The Cat Fund’s advisory council, which next meets in May, projected a $3.2 billion shortfall for the fund in October, on grounds that the fund likely would not be able to issue enough in post-event bonds to cover all its claims in the wake of a major storm season.
FIC reported that Cat Fund Chief Operating Officer Jack Nicholson briefed members on the fund’s capital plans, which could include a package of bonds with a variety of maturity dates, floating rate notes, or obtaining lines of credit. Nicholson reportedly said the fund would not likely purchase traditional private reinsurance, as obtaining $1 billion to $1.5 billion in coverage could cost as much as a third of the fund’s $1.3 billion in premiums.
