FT Alphaville " Massive catastrophe! bond Behold - what could be the largest natural catastrophe bond ever: That's S&P's ratings doc for Everglades Re Ltd. It's a bond to transfer some of the hurricane risk that a state-backed Florida insurer will face from writing policies for coastal homeowners. Losses from a Hurricane Andrew-level storm would wipe out the principal, according to modelling in the ratings doc. Citizens Property Insurance originally entered the market to sell $200m of notes. Artemis reports that the offering has since more than tripled to $750m ahead of closing, which is big for Citizens" first-ever cat bond. It could also be the biggest for cat bonds as an asset class, Artemis says: If Everglades Re completes at $750m in size it will become the largest catastrophe bond in the history of the market; for a single tranche, single peril cat bond to hit $750m is unprecedented in the history of the ILS market. The only single insurance-linked security to come close (that we have in our Deal Directory) would be Swiss Re's $705m Vita Capital III Ltd. mortality catastrophe bond. The largest single natural catastrophe bond we have in the directory is Residential Reinsurance 2007 Ltd. which completed at $600m. Swiss Re's first Successor cat bond deals in 2006 achieved $950m but were actually issued through a number of different individual transactions. As to why Everglades Re Ltd got so big - it could be that Citizens saw its chance to lock in fair pricing for its overall reinsurance risk for the two years of the life of the bond. It could also reflect investor hunger for the yield on offer (some 17.75 per cent above returns from Treasury money market funds is possible, says Artemis). The fiscal politics underlying all this also look interesting... Citizens is state-backed, but by going to private reinsurance markets is relying less on Florida's Hurricane Catastrophe Fund as a backstop for paying out claims. The FHCF has a circa $3bn hole in it, plus uncertainty over whether the state could issue bonds to finance its reimbursements to insurers. Proposals for filling this hole (short of shrinking the fund) seem gridlocked. At the same time, in the words of Aon Benfield's review of the reinsurance market, "Agents and policyholders believe that Citizens is too big to fail and therefore take advantage of its low rates and comprehensive coverage." Rates remain subsidised for homeowners. Quite a market for the biggest cat bond to sweep through. Related links: In Nature's Casino - Michael Lewis, NYT (2007) Irene's aftermath - FT Alphaville Catastrophe bonds hit highest level - FT This entry was posted by Joseph Cotterill on Monday, April 23rd, 2012 at 21:14 and is filed under Capital markets. Tagged with Catastrophe bonds, florida, hurricanes, insurance, insurers, reinsurance.