Heritage cites FHCF savings thanks to Citrus Re 2015 cat bond

by Artemis on May 5, 2015

Heritage Property & Casualty Insurance Co. is pleased with the pricing of its $277.5m three tranche Citrus Re Ltd. (Series 2015-1) catastrophe bond, which has enabled the insurer to save money by reducing its reliance on the Florida Hurricane Catastrophe Fund (FHCF).

Parent company Heritage Insurance Holdings Chairman and CEO Bruce Lucas said today; “We are pleased with the pricing for Citrus Re 2015-1 and particularly with the cost savings achieved by using the Class B and Class C notes to replace a portion of the FHCF.”

The $97.5m Class B tranche of notes and the $30m C tranche are the first catastrophe bonds issued to replace a portion of the coverage provided by the FHCF.

Heritage explained; “This industry leading transaction reduces Heritage’s level of participation in the FHCF to 75%, down from the typical 90% level used by most of the Florida Domestic Insurers.”

The three years of coverage provided by the cat bonds come in at an average rate that is below the costs of the FHCF coverage, according to Heritage.

The Class A notes provide another $150m of coverage, which Heritage said were placed “well within guidance.”

Added to the two 2014 cat bond issuances from Heritage, the $150m Citrus Re Ltd. (Series 2014-1) and $50m Citrus Re Ltd. (Series 2014-2), Citrus Re 2015-1 takes the total amount of collateralized reinsurance protection that Heritage sources from the capital markets and ILS investors to $477.5m.

Interestingly, Lucas explained that the fact that the FHCF had decided to buy its own reinsurance protection in 2015 was part of the reason for looking to reduce Heritage’s reliance on the Fund for its reinsurance protection.

“We were concerned that the FHCF would pass on a large rate increase resulting from its purchase of private reinsurance and wanted to protect our policyholders.  The pricing generated a savings for our reinsurance program for the three year period, and the  savings were amplified when the FHCF announced on April 14, 2015 that there would be a 7.29% rate increase on Floridians to incorporate the cost of its newly approved risk transfer program,” Lucas explained.

“We are proud to have had the foresight to once again recognize market trends before they happen, which we believe will result in an estimated $2.5 million in savings over the next three years.  We appreciate the support the ILS investor community has provided to Heritage and look forward to continued transactions,” he continued.

If the capital markets and ILS have now become so competitive that they can be used as a direct replacement for some of the FHCF coverage, we will see other insurers following suit.

We’ve heard that a number of other insurance companies are also looking to reduce FHCF participation in their upcoming June renewals, a trend that will ultimately result in more risk reaching the private markets and the ILS space.

You can read all about the Citrus Re Ltd. (Series 2015-1) catastrophe bond in the Artemis Deal Directory.

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