Citrus Re Ltd. (Series 2016-1) – Full details:
It’s the first time Heritage has included coverage for a subsidiary, the company entered into an agreement to buy Zephyr (a Hawaii based property catastrophe focused insurance company) in September. The acquisition has yet to complete and we understand that if it failed to then Zephyr would no longer be a cedent for this deal, with the coverage just applying to Heritage P&C.
This will be Heritage’s fourth catastrophe bond under the Citrus Re vehicle (details of each can be found in our Deal Directory). This transaction sees the insurer once again looking for a flexible source of fully-collateralized reinsurance protection from the capital markets in a layer of its program alongside its FHCF participation.
We’re told that this cat bond deal will see Citrus Re Ltd. issuing two tranches of Series 2016-1 notes, a (currently) $150m Class D-50 tranche and a $100m Class E-50 tranche, to collateralize an underlying reinsurance agreement with the ceding insurers.
Protection from both tranches will be on a per-occurrence basis and the notes feature an indemnity trigger. The protection will run across three U.S. hurricane seasons, we understand, from June 2016 to a maturity date in February 2019, so in total around two years and eight months.
Coverage is initially for losses suffered by either of Heritage P&C or Zephyr from named storms affecting Florida and Hawaii. However, as with other Citrus Re cat bonds from Heritage the covered area can be updated to include other hurricane exposed U.S. states, reflecting Heritage’s desire to expand and grow into other states of the U.S., something it is already doing.
The $150m Class D-50 tranche of notes attach at $360m of losses and coverage exhausts at $960m, however we understand that these notes inure to a layer of private reinsurance that provides $400m of cover above $360m of losses. That effectively makes these notes cover a percentage of a $600m layer attaching at $760m of losses, we believe.
The riskier $100m Class E-50 tranche cover a percentage of losses from $360m to $760m in the Heritage reinsurance program, so sit beneath the Class D-50 notes.
Class D-50 has an attachment probability of 4.19%, an expected loss of 3.01% and are being marketed to ILS investors with coupon guidance of 7% to 7.5%, we understand. Class E-50 has an attachment probability of 8.11%, an expected loss of 5.75% and are being marketed with price guidance of 10% to 10.5%.
So no surprise to see a higher multiple for the lower risk notes (2.4 times the EL at the base case and mid-point of pricing), with the higher risk/return tranche offering a multiple of 1.8 times the expected loss at the mid-point of pricing.
The Citrus Re 2016-1 cat bond does not look like it will upsize, being set to secure the $250m of fully-collateralized reinsurance cover Heritage was looking for from the off, however the pricing for each of the two tranches issued has been set at the top-end of initial guidance.
At the latest update, sources said that the tranche sizes have remained the same, with the $150m Class D-50 tranche and $100m Class E-50 tranche remaining static at pricing.
However both tranches priced at the top-end of pricing, as once again ILS investors sought to ensure a certain multiple of return from their investments in the cat bond.
The Class D-50 notes, which have an expected loss of 3.01%, were marketed to ILS investors with coupon guidance of 7% to 7.5%, but priced at the top-end of that range at 7.5%, we’re told. In terms of multiple that’s 2.5 times the expected loss.
The riskier Class E-50 notes, which have an expected loss of 5.75%, were offered with price guidance of 10% to 10.5% and priced again at the upper end of that range, at 10.5%. As a multiple these notes offer 1.8 times the base expected loss.
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 lowest down in the tower are the Citrus Re 2016-1 Class E-50 notes, which after reset attach at $330 million of losses to the sponsor.
Based on the notes covering 30% of a layer of Heritage’s reinsurance program, it looks as if this E-50 tranche could see around a 17% loss of principal, based on the latest loss estimate, which would equate to a loss to noteholders of roughly $17 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 $49 million of the $100 million tranche of Citrus Re 2016-1 Class E-50 notes.
Update, March 20th 2019:
The $150 million Citrus Re Ltd. Series 2016-1 Class D-50 tranche of cat bond notes which attached for Heritage at around $568 million of losses, have had their maturity extended by two more years out to February 25th 2021 to allow for further development of losses (likely related to hurricane Irma).