Florida Citizens eyes bumper catastrophe bond

Posted by on Apr 28, 2012 | 0 comments

LONDON, April 27 (Reuters) – The state-backed Florida Citizens Property Insurance Corporation is set to raise $750 million of hurricane protection through a sale of catastrophe bonds, more than three times the original target, market sources said.

The bond, issued through Forida Citizens’ Everglades Re vehicle, had been expected to raise just $200 million. The bond is due to close on Monday, and ranks as the biggest ever placed in a single tranche, they said.

The dramatic increase in the bond’s size reflects strong investor demand for the notes, which may have made it cheaper for Florida Citizens to buy cover through the cat bond market than through traditional reinsurance.

“This programme runs side by side with the reinsurance placement that they were planning, and they got a cost advantage,” said one market participant.

Investor demand for catastrophe bonds is on the increase, driven by their higher yields relative to regular stocks and bonds, as well as their relative immunity to economic downturns.

Interest in the instruments also reflects pent-up demand after a spate of costly natural catastrophes choked off new issuance for much of last year.

Strong investor appetite for cat bonds fuelled a record $2 billion of issuance during the first quarter of 2012, and the Florida Citizens issue looks set to bring the total for the year to date close to $3 billion, sources said.

Catastrophe bonds allow insurers and reinsurers to pass on some of the natural disaster risk on their books to capital market investors, freeing up capital for alternative lines of business.

Buyers of cat bonds benefit from returns that are largely insulated from wider economic or financial market developments, but risk losing some or all of their money if a catastrophe occurs. (Reporting by Myles Neligan; editing by Ron Askew)

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