Letter to the Miami Herald
In his letter about Citizens Property Insurance Corp.’s $750 million Everglades Re bond issuance, (May 30, “The next Greece” ) John Dasburg misunderstands a key feature of how catastrophe bonds work. While 17.75% interest may seem high for a fixed security, investors in the Citizens cat bonds are not only taking on the relatively low credit risk that the company will not be able to repay principle and interest, they are also taking on the much larger risk that Citizens will face a storm that causes them to pay more than $6.35 billion in losses over the next two years. If Citizens faces a loss of more than $7.35 billion, investors will be wiped out altogether.
In fact, the coupon Citizens will pay on the risk-transfer is quite attractive, which is why it upsized the offering from the initially planned $250 million to three times that size. Citizens also announced following the offering that it would double the total amount of private reinsurance it plans to buy from $750 million to $1.5 billion. That is most definitely good news, as it means a greater proportion of Citizens’ potential exposure will be transferred to global reinsurance and capital markets, and off of the backs of Florida taxpayers and policyholders.
If the Sunshine State is to avoid becoming “the next Greece,” we should hope Citizens and the Florida Hurricane Catastrophe Fund both explore these kinds of innovative risk transfer mechanisms to a much greater extent in the future.
Director of Public Affairs
R Street Institute