Florida takeout insurance company Heritage Property and Casualty Insurance Co. is returning to the capital markets as it seeks out low-cost reinsurance capital with its third catastrophe bond issue, a currently $150m Citrus Re Ltd. (Series 2015-1) transaction.
Heritage sponsored two takedowns under the Citrus Re special purpose insurer in 2014, a $150m Citrus Re Ltd. (Series 2014-1) and a $50m Citrus Re Ltd. (Series 2014-2). After those issues the insurer, which has aggressively participated in the Florida Citizens depopulation programme, said that it appreciated “the low cost of reinsurance” associated with its cat bond issues.
More recently Heritage CEO Bruce Lucas explained during the firm’s recent earnings call that last year’s cat bonds may have priced at levels lower than it could have achieved in the traditional reinsurance market this year, so it’s not surprising to see the insurer back seeking to expand its use of lower-cost ILS capital within its reinsurance programme in 2015.
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.
The Citrus Re 2015-1 catastrophe bond is being brought to market for Heritage P&C by Willis Capital Markets & Advisory, while AIR Worldwide is providing the risk modelling services.
It will be interesting to see how this deal comes to market and just how much reliance Heritage P&C is willing to place on the capital markets for its reinsurance programme. Given the $150m (or maybe $200m) Class A tranche with two more yet to be sized, the deal could upsize significantly if Heritage wanted to.
Given the insurers prior experience and appreciation for lower-cost ILS capital, should pricing be as attractive as the insurer found in 2014 it is likely to maximise the issuance where possible.
We’ll update you further as the Citrus Re Ltd. (Series 2015-1) catastrophe bond comes to market and you can read all about it, as well as Heritage P&C’s other cat bonds, in the Artemis Deal Directory.