Florida's Citizens Issues Largest Cat Bond Ever: $1.5B

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BRADENTON, Fla. — Florida's Citizens Property Insurance Corp. priced an upsized $1.5 billion catastrophe bond deal Thursday to protect itself from losses along the state's coast due to hurricanes.

The insurance-linked securities deal is the largest of its kind.

Investor demand and marketing helped the state-run insurer boost the 144A offering from its initial $400 million amount to $1.5 billion at a price 7.5%.

In 2013, Citizens sold $250 million of cat bonds at a rate of 10%, according to Artemis.bm, an online news service covering the insurance and risk-linked markets. Cat bonds sold in 2012 priced at 17.75%.

The final size of the cat bond was approved by Citizens board Thursday morning with final pricing later in the day. The board also approved the purchase of $1.3 billion in traditional reinsurance.

The cat bonds and traditional reinsurance are risk-transfer products that cover claims for losses in Citizens coastal account, which insures properties along the state's shoreline. In the case of cat bonds, investors lose most or all principal if certain events are triggered.

Combined, the cat bonds and reinsurance are expected to cost Citizens $300 million for $2.88 billion of coverage, a significant reduction in costs compared to recent years.

In 2013, the risk-transfer program cost was $304 million for $1.85 billion of coverage. In 2012, $1.5 billion of combined coverage cost $276 million.

"We've been able to capitalize on favorable market conditions across the board to maximize our 2014 risk transfer program," said chief financial officer Jennifer Montero. "Such market conditions have allowed us to exceed our initial expectations in regard to the level of reinsurance coverage at the most efficient pricing."

Much of the coverage purchased will cover events over three years as opposed to single-year coverage purchased previously.

The 2014 cat bonds, rated B(sf) by Standard & Poor's, were sold by Everglades Re Ltd., a special purpose vehicle based in Bermuda. Citi was the book-runner and Bank of America Merrill Lynch was a joint book-runner. Raymond James was financial advisor. Closing is May 2.

Citizens expects to have total claims-paying capacity of $11.8 billion in the coastal account, which has $164.6 billion in exposure. The insurer has two other accounts that did not require additional coverage from cat bonds or reinsurance. Certain accounts also obtain mandatory reinsurance coverage through the state-run Florida Hurricane Catastrophe Fund.

The nonprofit Citizens was created by Florida in 2002 to provide property and wind insurance around the state where it is not available in the private market.

Hurricane Andrew in 1992 resulted in the insolvency of nearly a dozen private insurance companies while others left the state or severely cutback on underwriting risk.

The destabilization of the state's property insurance market prompted the state to create Citizens and the Cat Fund to provide low-cost reinsurance. Both entities issue municipal bonds.

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