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Cat bonds cheaper, more valuable, relative to FHCF reinsurance: Heritage


For Heritage Property & Casualty Insurance the attractive pricing and more flexible terms of its $277.5m Citrus Re Ltd. (Series 2015-1) catastrophe bond, provides cheaper and more valuable reinsurance protection than the Florida Hurricane Catastrophe Fund (FHCF) it replaced.

Heritage, the rapidly growing Florida-based primary insurance company, elected to use its catastrophe bond issuance in 2015 in order to lower its reliance on buying reinsurance protection from the FHCF.

At the time of issue the insurer explained that the latest Citrus Re cat bond lowered its “level of participation in the FHCF to 75%, down from the typical 90% level used by most of the Florida Domestic Insurers.”

Bruce Lucas, Chairman and CEO of Heritage, explained the pricing achieved for the 2015 Citrus Re cat bond recently; “We were happy with the pricing that we received on those layers,” he explained to analysts, “I think our fully loaded cost structure there was around 7.11%.”

That 7.11% all-in cost for the Citrus Re 2015-1 cat bond is an impressively low figure anyway, it includes the cost due to coupon payments to investors and also all issuance, structuring and service provider expenses associated with the deal as well.

For 2015 the FHCF is raising its rates, due to its acquisition of reinsurance coverage for the first time. Heritage expects this increase to be taking the rate it would have paid up from 7.6% to 8.2% at this renewal.

So the cost to Heritage is significantly lower for the catastrophe bond protection that allowed it to reduce its participation in the FHCF.

Given the often lower cost of catastrophe bond coverage, thanks to efficient capital from ILS investors and funds, you’d expect that the cat bond may have saved Heritage money. However the relative value doesn’t stop there.

The Citrus Re 2015-1 cat bonds offer Heritage significantly more value, on a relative basis, to the FHCF coverage it has replaced. As well as being lower-cost, the cat bonds have more flexibility and also would cover Heritage for risks it may take on outside of Florida, were it to expand its horizons during the term of the deal.

Lucas explained; “It was particularly valuable versus the FHCF for sure, given where the rate online is at FHCF this year. Our ability to identify, once again, the market trend before it happened and execute on it is there. And to place the bonds where we placed them, with the fully loaded cost of 7.11% and then look at where the FHCF rate-on-line is at around 8.2%, it’s pretty good.”

Heritage is one of the first to utilise catastrophe bonds as a replacement for FHCF coverage. A number of other insurers are achieving similar reductions in FHCF participation, some through traditional reinsurance and others through collateralized protection, but Citrus was the first cat bond to do so.

“I mean we definitely led the market. It was an innovative bond. We work closely with our ILS partners and had a favourable placement there, and it turned out to be the right decision for our policy holders,” Lucas said.

Also read:

Heritage cites FHCF savings thanks to Citrus Re 2015 cat bond.

Heritage P&C’s Citrus Re 2015-1 cat bond to complete at $277.5m.

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