Heritage puts Matthew losses below $100m, Citrus Re cat bonds safe

Heritage Insurance Holdings Inc. said it expects its losses from hurricane Matthew will be less than $100m, with losses above a $40m retention falling within the insurers reinsurance tower but missing the $727.5m of Citrus Re catastrophe bonds.

The riskiest of the Citrus Re catastrophe bonds attaches at $200m of losses to Heritage, so at below $100m the property and casualty insurance firm will be left to call on its reinsurance protection for any losses above its $40m retention.

Subsidiary Heritage Property & Casualty Company (Heritage P&C) Chairman and CEO Bruce Lucas had originally suggested that losses could reach as much as $500m for the firm, a level that could have put some Citrus Re cat bonds at risk, but that was at a time when hurricane Matthew was forecast to be significantly more impactful to Florida’s coastal counties and it quickly became clear that the worst case scenarios were becoming less likely to occur.

As hurricane Matthew largely paralleled the shoreline the industry loss for the insurance and reinsurance industry is now expected to be significantly lower, with early estimates suggesting somewhere around the $4 billion to $6 billion mark.

CEO Lucas explained that claims continue to be filed, but that the insurers current modelled loss estimates are now “considerably below our initial loss projections from the storm.”

“We now anticipate estimated losses from Hurricane Matthew to be under $100 million, of which $40 million will be retained by the Company, well within our $1.9 billion reinsurance tower. The fact that we are able to withstand two hurricanes in one year with relatively minor anticipated impacts to our reinsurance tower speaks volumes to the strength of our reinsurance program and surplus in our insurance company,” Lucas said.

Heritage P&C’s reinsurance arrangements provide the firm with significant protection. With just $20m of first event losses retained by the company and another $20m by its Osprey Re captive reinsurance firm, any event of magnitude sees losses paid for by the reinsurance market and any collateralised participation from ILS funds.

Heritage actually has $3 billion of reinsurance cover. The $1.9 billion tower is the insurers first event protection for Florida. It also has first event coverage up to $1.1 billion in Hawaii, and multiple event coverage amounts to $3 billion.

The four outstanding Citrus Re catastrophe bond issues all sit at $200m of losses and upwards in the insurers reinsurance tower, hence had the impact of Matthew been much worse for the firm the cat bonds could have come into play.

It’s interesting to note that at least one cat bond trading broker had marked down the most risky tranche of Citrus Re for bids of 85, while others had kept it at closer to 100, reflecting that some had thought this was one of the cat bonds considered at risk due to hurricane Matthew. The price on this tranche will no doubt bounce right back to 100 when the next pricing sheets are published.

Traditional reinsurance firms may take the majority of the loss Heritage claims back from its reinsurers, but there is likely to be some alternative capital from ILS funds providing collateralised coverage even at this low level in the insurers tower. However any loss from Heritage that was taken by collateralised reinsurance is likely to be small.

Bruce Lucas, Chairman and CEO of Heritage commented; “Our claims support and mitigation teams continue their tireless efforts to reach policyholders and provide assistance during this difficult time. While the impact of Hurricane Matthew could have been much worse for our Company and the insurance industry as a whole, we have a lot work to do. Our focus now is on restoring normalcy to our insured property owners afflicted with damage from the storm.”

Heritage’s $727.5m of outstanding catastrophe bonds, through four transactions, include the most recent $250m Citrus Re Ltd. (Series 2016-1) the $277.5m Citrus Re Ltd. (Series 2015-1), the $50m Citrus Re Ltd. (Series 2014-2) and the $150m Citrus Re Ltd. (Series 2014-1).