Florida Insurer Issues Largest Catastrophe Bond in History

Published May 14, 2012

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 catastrophe insurance 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 investors 17.75 percent 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, which is below the cat bond trigger. A 25-year event carries a probable maximum loss of $7.36 billion. The PML of a 100-year event is $21.4 billion.

Private Sector Interest

The news of the cat bond’s successful placement seems to 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. The law also reduces regular assessments on coastal accounts from 6 percent to 2 percent and lengthens the time frame private property-casualty insurers have to pay the assessments.

Citizens still has the ability to seek emergency assessments on both its own and other companies’ policyholders for up to 10 percent of annual premiums.

Timid on Risk Reform

Despite 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 has 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 percent should apply to new policies. Administrators are considering a proposal to lift the rate increase cap for new policies, which they hope will both speed efforts to reduce the number of policies written by Citizens and help bring Citizens’ overall risk profile closer to being actuarially sound.

Citizens has approximately 1.4 million policies in force with total exposure of $502.98 billion.