Citrus Re 2017-1 cat bond price guidance drops on investor demand

Coupon price guidance for the recently launched $125 million Citrus Re Ltd. (Series 2017-1) catastrophe bond has been lowered significantly, as investor demand for cat bond investments looks set to offer sponsors very attractive conditions.

Heritage Property & Casualty Insurance Company is sponsoring its fifth Citrus Re named catastrophe bond issuance with this deal that launched in February.

Citrus Re 2017-1 will provide Heritage with a multi-year source of fully collateralized reinsurance protection against U.S. named storm risks, initially across the four main states where Heritage operates, Florida, Georgia, South and North Carolina.

With a three-year risk period, the Citrus Re 2017-1 notes will provide sponsor Heritage with capital market backed reinsurance coverage on a per-occurrence and indemnity trigger basis.

The $125 million single Class A tranche of Citrus Re Series 2017-1 notes have an attachment point at $40 million, covering losses up to an exhaustion point at $165 million. That notes have a modelled attachment probability of 5.33% and an expected loss of 3.08%.

At launch these notes were offering investors a coupon somewhere in a guidance range from 6.5% to 7.25%, which would have been a fairly typical multiple even at the lowest and of price guidance, around 2.11 times the expected loss.

But now we understand that Heritage could benefit from even more attractive pricing, as the coupon guidance range has been lowered to below the initial one, with these notes now offered with price guidance of 6% to 6.5%.

So that means the multiple could be lower, unless they now price at the top-end of the new guidance range.

Cat bond investors are keen to see more issuances, with the market having plateaued a little in recent years. There is significant capital available to support new cat bond risk coming to market, and as investors become increasingly familiar and confident with sponsors track records, that means attractive pricing can be achieved (compared to traditional reinsurance).

It perhaps makes sense that Heritage has come to market with a smaller transaction with no room for upsizing now, as it provides the sponsor with a way to test out market appetite, which based on this price guidance reduction looks to be strong. It will be interesting to see whether Heritage comes back with another tranche of notes if this deal completes at a particularly low multiple.

For other potential sponsors looking at the catastrophe bond market this should send a sign that there is an opportunity to secure very attractively priced reinsurance and retrocession in the cat bond market right now.

Swiss Re recently said that 2017 could be the year of the cat bond. If pricing multiples at market continue to decrease, as we’ve been tracking since 1997 here, that may just be proven to be true, offering a chance for existing sponsors to return and bulk up on cat bond coverage, or for new sponsors to try out this market.

This Citrus Re Ltd. (Series 2017-1) is expected to complete around the middle of March, with final pricing expected next week we understand. We will keep you updated.

You can read all about this and every other catastrophe bond transaction in the Artemis Deal Directory.