Heritage reveals hurricane Irma loss, may hit Citrus Re cat bonds

Florida focused property and casualty insurer Heritage Insurance Holdings, Inc. has revealed a $388 million gross loss from the impact of hurricane Irma, which looks high enough to eat into the bottom of its catastrophe bond protection, likely triggering two tranches of its Citrus Re cat bonds.

Heritage has a significant reinsurance program in-force, with around $737 million of catastrophe bond capacity outstanding and also collateralized reinsurance capacity backing its program as well.

Heritage’s strong reinsurance protection means that it will only retain a small amount of its gross hurricane Irma losses at $20 million, with the rest falling to its reinsurance capital providers.

Among those are some of the ILS investors backing Heritage’s catastrophe bonds, it seems, with the $388 million gross loss likely to eat into the riskiest Class E-50 $100 million tranche of notes from its Citrus Re Ltd. (Series 2016-1), which is the cat bond that sits the lowest down in its reinsurance tower, attaching at $330 million of losses to the sponsoring insurer.

Heritage’s losses from hurricane Irma also look likely to eat into the riskiest Class C tranche of the Citrus Re Ltd. (Series 2015-1) cat bond as well, which attaches at $356 million of losses now.

Heritage’s cat bond structure is relatively complex, with inuring layers of reinsurance protection benefiting some of the tranches of notes. But from our analysis of its cat bonds after its mid-year 2017 reset, it looks like there will be some level of losses faced by the two tranches we reference above. It’s hard to tell whether any others could face a loss at this stage, but Heritage’s estimate of losses could change so it can’t be ruled out yet.

It’s difficult to forecast the exact losses, but the Citrus Re 2016-1 Class E-50 notes cover 30% of a layer, so the loss to noteholders could be around $17 million, based on Heritage’s gross losses from hurricane Irma going $58 million above the attachment point.

For the Citrus Re 2015-1 Class C notes, which cover 15% of a layer of the reinsurance program, the loss to noteholders could be much lower at around $5 million, as Heritage’s Irma loss only stretches $32 million above the attachment point for this cat bond.

We’ll have to wait for further information to emerge before we can confirm these losses, we’re working off an old layer chart of Heritage’s reinsurance program and the Deal Directory information we have for the Citrus Re transactions. But at this stage it does look like some level of payout will be due to Heritage from its catastrophe bonds, which is positive for the insurer.

Bruce Lucas, the Chairman and CEO of Heritage Insurance Holdings, explained the benefits of its multi-year catastrophe bond coverage, “We had the foresight to buy approximately $700 million of three-year catastrophe bonds with fixed pricing. If reinsurance prices increase in 2018, Heritage will be less impacted than our peer companies that buy traditional single-year reinsurance programs. We believe that potentially lower reinsurance costs will create a competitive advantage for the Company.”