Citrus Re 2017 cat bond notes trade down 50% on hurricane Irma threat

A number of secondary catastrophe bond trades were seen as major hurricane Irma intensified on track towards the United States, possibly Florida, with the Citrus Re Ltd. (Series 2017-1) leading the prices down having traded at 50 yesterday, so discounted 50% on the possibility of an Irma loss for sponsor Heritage.

Heritage Property and Casualty Insurance Co. sponsored the Citrus Re 2017-1 catastrophe bond in March this year, securing $125 million of U.S. named storm and hurricane protection.

Heritage has its highest concentration of risk in the Florida peninsula, where hurricane Irma is on track for, and is a heavy user of collateralised reinsurance products including catastrophe bonds, so is likely seen as one of the primary insurers at most risk of losses.

In fact, Heritage’s share price fell almost 17% yesterday, reflecting investors and the markets expectations that the insurer is particularly exposed to hurricane Irma.

Catastrophe bond investors clearly agree and we’re told that this Citrus Re 2017-1 cat bond traded on Friday and Monday, but on Tuesday 5th September the bonds trade price plummeted, with one investor selling $1 million of the notes at a price of 50, down from the previous secondary trade price (according to Trace) of 100.55.

That’s a significant dip in secondary price for this cat bond, reflecting one ILS investor or ILS fund’s uncertainty over hurricane Irma and belief that Heritage could take a sizeable loss.

The Citrus Re 2017-1 cat bond notes have an attachment point at $40 million of losses and cover $125 million of Heritage’s losses up to an exhaustion point of $165 million, which gives an attachment probability of 5.33% and an expected loss of 3.08%.

The notes sit on top of reinsurance arrangements that Heritage has in place, so these would need to be eroded before the cat bond comes into play.

In fact, the other Citrus Re catastrophe bonds (so Citrus Re Ltd. (Series 2017-2), Citrus Re Ltd. (Series 2016-1) and Citrus Re Ltd. (Series 2015-1), all sit beneath the 2017-1 deal so are at greater risk of loss. All of these are per-occurrence bonds.

So it looks like the Citrus Re 2017 trade at 50 was a case of an investor wanting to avoid being caught with a potentially exposed position in their portfolio, rather than this being the riskiest bond in the market based on hurricane Irma’s threat.

You can see Heritage’s reinsurance program for the U.S. below, including all the Citrus Re cat bonds.

It’s also of note that a Galilei Re Ltd. (Series 2016-1) Class E-1 trade was seen at 95, a cat bond that had previously been priced at 100 or greater. This could be as sponsor XL Group has one of the highest PML’s for a Florida wind event, but again this looks like one investor offloading any potentially exposed bonds as there are other tranches of Galilei Re notes which have a higher expected loss.

We’re told by sources that buying and selling activity was relatively brisk on Friday and Monday, but slower Tuesday reflecting the uncertainty that remains in the hurricane Irma forecast, with many believing it’s still too early to predict specific cat bond losses.

Activity will likely pick up as certainty increases, but with the forecast track having shifted back east again today it’s possible that investors will want to sit it out a little longer before secondary cat bond trading becomes more liquid again.

Details of every catastrophe bond in the market can be found in the Artemis Deal Directory.

Our latest cat bond market report, ‘Q2 2017 Cat Bond & ILS Market Report – First double-digit year ahead, $10 billion imminent’, provides much more insight into the record level of issuance seen in the second-quarter, while our range of catastrophe bond market charts and data visualisations allow you to analyse the outstanding market in more detail.

Don’t forget to check out our Cat Bond Market Dashboard as well, for a snapshot of the ILS market.