Citrus Re Ltd. (Series 2015-1)

In this new issuance Citrus Re Ltd., Heritage P&C’s Bermuda SPI, will seek to issue three tranches of Series 2015-1 notes to collateralize reinsurance agreements between itself and the insurer. The protection will run for three U.S. wind seasons, beginning in June 2015 and running to April 2018, sources said.

At the moment the issuance is being marketed with a size of $150m which we understand from sources to be attributed to just the Class A notes at this time, with no size attributed to Class B or Class C. Whether that signals an ability to upsize this deal, or simply that the Class A note layer of protection is the priority is unclear.

The protection afforded to Heritage P&C by this Citrus Re 2015-1 cat bond will be for Florida named storms initially, with an ability to update the covered area to include more states should the insurer choose, or expand into new states. The cat bond is structured with an indemnity trigger, providing protection on a per-occurrence basis.

The Class A notes sit in a layer between Heritage P&C’s two 2014 Citrus Re cat bond, with an attachment point of $410m and an exhaustion point of $610m. While this tranche is currently marketed at $150m in size we understand that the hope is that it covers the full potential for losses within this layer, so Class A could grow to $200m it appears. If successful that would mean that the majority of the top of Heritage’s reinsurance tower would be covered using catastrophe bonds.

Class B attaches at $336m with an exhaustion point high up at $986m, while Class C attach at $336m as well but with a lower exhaustion point at $536m. However we’re told the Class B notes have a reinsurance layer which inures to it, where as the Class C do not, which effectively makes C the highest risk tranche of the cat bond deal.

In terms of probabilities and pricing the three tranches look as follows.

Class A has an initial attachment probability on a base-case of 1.31%, an exhaustion probability of 1.14% and an expected loss of 1.22% (which rises to 1.41% using WSST sensitivity case). Artemis understands that the price guidance for the currently $150m of Class A notes is 4.25% to 5%.

Class B has a base attachment probability of 4.01%, an exhaustion probability of 1.44% and an expected loss of 2.44% (2.79% on a WSST basis). This tranche is being offered to investors with a price guidance range of 6% to 6.25%.

Class C has a base attachment probability of 6.23%, an exhaustion probability of 4.01% and an expected loss of 5.05% (5.64% on a WSST basis). The Class C notes are being offered with price guidance of 9% to 9.25%. Note again that the Class C notes may attach at the same level of losses as Class B, but they have no inuring reinsurance and so are riskier.

From the way this cat bond has been structured it is possible that both the Class B and Class C notes may not survive, as it gives Heritage P&C a chance to test the market and investor appetite before perhaps pulling one or the other. We’ll have to see how the deal progresses to market.

The Class B and Class C protection sits directly alongside Heritage P&C’s Florida Hurricane Catastrophe Fund coverage, we understand, which could mean that if these tranches are successfully issued the insurer could reduce its reliance on the FHCF (if it chose to).

The transaction features a variable reset feature allowing the protection to be moved slightly, within defined boundaries of attachment and expected loss.

Update 1:

The Citrus Re Ltd. (Series 2015-1) catastrophe bond could close at $327.5m in size thanks to demand from investors, while pricing has moved to the mid and lower ends of guidance.

The Class A tranche of notes launched at $150m in size, with an expected loss of 1.22% (which rises to 1.41% using WSST sensitivity case) and price guidance of 4.25% to 5%.

At the latest deal update the Class A tranche is now being marketed as $150m to $200m in size and with price guidance narrowed towards the mid-point at 4.5% to 4.75%.

The Class B notes have an expected loss of 2.44% (2.79% on a WSST basis) and was offered to investors with a price guidance range of 6% to 6.25%. We understand that this tranche is now sized at $97.5m and the price guidance has moved to the bottom of guidance at 6%.

The Class C notes have an expected loss of 5.05% (5.64% on a WSST basis) and initial price guidance of 9% to 9.25%. This tranche is sized at $30m and the pricing has fallen to the bottom end of guidance at 9%.

So if the cat bond completes with the Class A tranche at the upper size at $200m, with a $97.5m Class B tranche and a $30m Class C tranche, Heritage Insurance will have a $327.5m catastrophe bond sourced collateralized reinsurance cover.

Update 2:

The Class A tranche failed to upsize and completed at $150m. The pricing on Class A settled at the top of the adjusted range at 4.75%.

Class B and Class C remained as at the last update, so $97.5m and $30m and with no change to the pricing.

That made this Citrus Re 2015-1 catastrophe bond issue a total size of $277.5m for Heritage P&C.

Update, November 1st 2017:

Heritage’s catastrophe bonds look set to take some losses due to the impacts of hurricane Irma.

Heritage announced 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 within its reinsurance tower.

Sitting second from bottom of the cat bonds in its reinsurance tower, the $30 million tranche of Citrus Re 2015-1 Class C notes look likely to face a loss as they attach at $356 million of losses to the sponsor.

The $30 million of Citrus Re 2015-1 Class C notes cover 15% of a layer of the reinsurance program, which means the loss to the tranche could be around a 16% loss of principal, which to noteholders could be around $5 million.

Update, February 27th 2018:

Heritage’s exposure to hurricane Irma has become a little clearer, after the insurer notified investors of its estimated amounts it can claim under this catastrophe bond.

Heritage currently hopes to claim back $20 million of the $30 million of Citrus Re 2015-1 Class C notes.

Update, April 12th 2018:

Heritage has let the lowest risk Class A tranche of notes from this cat bond mature, but both the Class B and Class C have had their maturities extended to April 9th 2020, suggesting Heritage expects to make reinsurance recoveries from both of these tranches.

Update, March 20th 2019:

The $30 million Citrus Re Ltd. (Series 2015-1) Class C tranche of notes, which was the riskiest from this vintage of Citrus Re cat bonds having attached low down the reinsurance tower for Heritage (at around $356m of losses, we understand), has been allowed to mature with a balance of zero. As a result we assume this tranche, being the riskiest, has now paid our for sponsor Heritage.

Update on losses/redemptions:

For the latest details on potential losses for this bond please view our directory of catastrophe bond losses and cat bonds considered at-risk.