Florida Citizens plans mother of all cat bonds

by R.J. Lehmann on April 23, 2012

We’ve written before about Everglades Re Ltd., the Bermuda special purpose vehicle that Florida’s Citizens Property Insurance Corp. is using to issue its first-ever catastrophe bond. But according to risk management blog Artemis.bm, what earlier this month looked like a nice first step for Citizens now looks like it could be a landmark event:  the largest single-tranche, single-peril cat bond in history.

Observers already expected some upsizing from the originally proposed $200 million Everglades Re offering, as Citizens had budgeted $250 million for alternative risk transfer as part of its $1 billion 2012-2013 reinsurance program. However, Artemis reported receiving “a number of excited emails and phone calls from participants in the market” telling them that, in marketing the offering, Citizens has actually tripled that ART budget, and will go to market with a two-year, $750 million offering.

Details will likely remain fuzzy until the offering actually prices. Artemis noted that it remains unclear whether the attachment or exhaustion points of the bond have been adjusted. The original attachment point would see coverage from the bond kick in once Citizens suffered at least $6.35 billion of net windstorm losses, and would be fully exhausted once losses hit $7.35 billion. The interest coupon was expected to be 1,650 to 1,800 basis points (16.5% to 18%) over whatever Treasury money market fund rates were paying over the same period.

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.

This is extremely good news, not the least of which because the more risk that Florida Citizens successfully places in the global capital and reinsurance markets, the less is concentrated within the Sunshine State (and, of course, on the backs of Florida taxpayers.) It also provides hope of reducing some pressure on the state-run Florida Hurricane Catastrophe Fund, which has historically has been Citizens’ primary source of reinsurance.

And most importantly, it didn’t require a dime of federal money to backstop the deal, truly putting the lie to claims of Beach House Bailout advocates.

In other good news, Citizens reported that its policy count is continuing to decline. As of March 31, Citizens had 1.44 million policies, down 2.4% from the end of January, while total risk fell 10% over that period to $503 billion. The reduction is due to private insurers removing policies, primarily from Citizens’ residential multi-peril and wind-only books of business. Citizens’ board also moved in February to reduce coverage for secondary structures, personal contents, new construction and personal liability, as well as to increase sinkhole deductibles by 10%.

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