Florida’s Citizens Issues Largest Catastrophe Reinsurance Bond on Record

By | May 3, 2012

Florida’s Citizens Property Insurance Corp. has entered the catastrophic bond market in a big way by issuing $750 million in bonds, making it the largest insurance-linked security deal of its kind.

Citizens Property Insurance Board Chair Carlos Lacasa declared it to be “a historical day for the state of Florida in reducing the potential for assessments on all Florida policyholders after a catastrophic event.”

According to the Artemis Catastrophic Bond and Insurance-linked Securities Deal Directory, the bonds are being issued through Everglades Re Ltd., a Bermuda domiciled special purpose insurers set-up for the sole goal of issuing Citizens-backed securities.

Initially, officials projected offering $200 million in securities. However, due to interest from investors, the deal reached $750 million making it the largest single peril cat bond in the history of the insurance linked securities market. Until then, the largest single natural catastrophe bond deal was the $600 million offering by Residential Reinsurance 2007 Ltd.

Citizens officials said that 32 investors participated in the deal, many of whom are new to the cat bond market. The investors, who have yet to be identified, likely are sophisticated institutional investors, insurance-linked investors and pension fund managers.

While the proceeds from the deal would cover both Citizens’ personal lines and its coastal lines accounts, most of it would be earmarked for wind-only coverage on properties located along the state’s coastline. The notes would cover losses above an attachment point of $6.35 billion up to $7.35 billion

The rating agency Standard & Poor’s rated the bonds at B+.

Everglades Re projected that the bonds would pay rates of return between 16.5 percent and 18 percent higher than those offered by the Treasury Money Market Fund.

Citizens Chief Financial Officer Sharon Binnun said the insurer was “pleasantly surprised,” by the size of the deal. The insurer has been working for several years to shift its financing so that it is not so dependent of policyholder assessments.

“We can’t stop the wind from blowing,” said Binnun. “But we can reduce the possibility of assessments.”

More Private Deals to Come

As significant as the $750 million industry-linked securities deal is to Citizens’ overall financial picture, officials say they are not done when it comes to seeking out more private investors’ money.

In December 2011, the Citizens board set out a goal of transferring at least $1 billion of its financial exposure to the private market. With the Everglades Re Lt., deal done, the insurer can now focus on the more traditional reinsurance market. And since many of them didn’t participate in the Everglades Re deal, they still have plenty of capital to work with.

Binnun said the Everglades Re deal opened a whole new door when it comes the capital markets, which benefits Citizens and private insurers alike.

“This brings to Citizens a significant increase in the diversification and capacity of risk transfer resources, while not adversely affecting the availability of risk transfer for the Florida private market,” Binnun said.

The Citizens board of governors is slated to meet later this month to discuss its investment strategy.

After having met three-quarters of its private risk-transfer goal, and given investors interest in the investing in Citizens, officials are likely to up the ante when it comes to executing private market deals.

“Our direction to management is to continue to secure a significant amount of additional risk transfer through the traditional reinsurance markets,” said Lacasa. “I look forward to a total risk transfer program in excess of the $1 billion budgeted for 2012.”

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