It’s now official. Everglades Re Ltd., the first-ever catastrophe bond from Florida’s Citizens Property Insurance Corp., will go down as the largest single-tranche, single-peril cat bond in history, with a record offering size of $750 million.
The offering’s Class A notes have been rated B+ by rating agency Standard & Poor’s. The two-year notes would cover three-quarters of the $1 billion in private reinsurance Citizens projected it would obtain for the 2012 storm season, which starts June 1.
The bonds will pay a coupon to investors of 17.75% above U.S. Treasury money market fund rates, which is considered fairly generous, although perhaps necessary for a catastrophe-prone region like Florida. They will have an attachment point of $6.35 billion, which is a relatively high trigger, and become exhausted at $7.35 billion.
Citizens projects its probable maximum loss from a 10-year event is about $2.85 billion, so that would be below the cat bond trigger. A 25-year event carries a PML of $7.36 billion and the PML of a 100-year event is $21.4 billion.
Citizens originally anticipated it would spend $150 million on ceding to private reinsurers this year and $50 million for “alternative risk transfer” vehicles such as cat bonds. It also projects to spend $550 million on cessions to the Florida Hurricane Catastrophe Fund and to finish the year with $6.18 billion of surplus, up from $5.61 billion at year-end 2011.
The news of the cat bond’s successful placement certainly seems to amply demonstrate private sector interest in catastrophe risk, and it comes at a good time for Citizens, which is losing some of its power to lay “hurricane taxes” on the private market. Earlier this year, the state Legislature passed H.B. 1127, which eliminates the regular assessment layers (which could be charged to virtually all property/casualty policies in the state in the event of a funding shortfall) that Citizens could charge on its commercial and personal lines accounts to cover, while reducing regular assessments on coastal accounts from 6% to 2% and lengthening the time frame private P&C insurers have to pay the assessments.
Citizens still has the ability to seek emergency assessments on both their own and other companies’ policyholders for up to 10% of annual premium.
Despite successful passage of H.B. 1127, the Legislature once again balked at taking more serious steps to scale back the risks posed both by Citizens and the Cat Fund. Perhaps somewhat ironically, the leadership of both institutions have been much more aggressive in sounding the alarm for reform than Florida lawmakers have been.
Most recently, Citizens announced it was examining whether 2009 legislation that limited annual rate increases to 10% should be considered to apply to new policies. They are considering a proposal to lift the rate increase cap for new policies, which they hope will both speed along depopulation efforts and help bring Citizens’ overall risk profile closer to being actuarially sound. Estimates of rate adequacy from Citizens’ actuarial staff showed that both personal lines and commercial residential rates are currently short by 42.3%, while commercial nonresidential rates are 75% below the actuarially indicated levels.
As of March 31, Citizens had 1.4 million policies in force with total exposure of $502.98 billion. Despite ongoing efforts to depopulate Citizens through transfers of blocks of policies to the market, in December, the company projected its policy count would rise 11.5% this year and finish the year at about 1.7 million.
