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Some of Heritage’s Citrus Re cat bond tranches appear to be paying out


Some of Florida focused property and casualty insurer Heritage Insurance Holdings, Inc’s Citrus Re Ltd. catastrophe bond tranches appear to be paying out, following the rising losses the carrier suffered after hurricane Irma in 2017.

heritage-logoHeritage was among the insurers with the broadest exposure to 2017’s hurricane Irma, given its significant footprint in the state of Florida, especially in the wind exposed coastal and other regions.

After Heritage revealed that its gross incurred losses from hurricane Irma had risen to $900 million recently, it was always expected that a number of tranches of the insurers in-force catastrophe bonds would pay out.

Heritage, like so many Florida focused insurance carriers, has layered catastrophe bonds up its reinsurance tower to leverage efficient supporting capacity from ILS funds and capital markets sources.

The use of cat bonds as part of the reinsurance tower helps insurers like Heritage to both make their reinsurance renewals more competitive, by leveraging both sides of the market, but also diversifies their sources of reinsurance capital at the same time.

For Heritage, this strategy to leverage the capital markets increasingly within its reinsurance program looks to have paid off, as some of its cat bond tranches that were exposed to hurricane Irma now appear to have paid out for the firm.

Two of the most risky of the exposed tranches of Heritage’s cat bond program that we have sufficient detail on have now been matured with balances of zero.

We suspect this means they have paid out, to the benefit of sponsor Heritage, providing a valuable reinsurance payment to assist with the losses it has suffered.

But we have to caveat that by saying we’re working with limited information at this time, hence the percentage payouts etc. and even the fact they have paid out could be inaccurate (we’re always happy to be corrected, so feel free to drop us a line).

These tranches are, the $30 million Citrus Re Ltd. (Series 2015-1) Class C tranche of notes, which was the riskiest from that vintage of Citrus Re cat bonds, having attached low down the reinsurance tower for Heritage (at around $356m of losses, we understand).

As well as the $35 million privately placed Class B tranche of the Citrus Re Ltd. (Series 2017-2) issuance, which attached at around $474 million of losses at the time of Irma, we believe.

Both of these tranches appear to have paid out their full principal, as far as we can tell from the limited information we have available, given their note balances are now marked at zero.

We’ve marked them as such in our directory of catastrophe bond losses and cat bonds considered at-risk.

Both of these tranches provided Heritage with per-occurrence collateralized reinsurance protection and there are other tranches that remain at-risk of paying out, but losses have yet to be determined for them it seems.

As well as these two tranches of Citrus Re cat bonds that have been matured with balances of zero, one other tranche that is exposed to hurricane Irma has had its maturity further extended into the future to allow for continued development of losses, we assume.

This is the $150 million Citrus Re Ltd. Series 2016-1 Class D-50 tranche of cat bond notes, that sits in the middle of the Florida reinsurance tower for Heritage, with an attachment point at around $568 million.

The $150 million D-50 tranche of the 2016 Citrus Re cat bond remains priced for around a 50% to 60% loss of principal at this time, on secondary broker pricing sheets. The maturity for this tranche has now been extended by two years out to February 25th 2021.

The other $100 million Class E-50 tranche of this Citrus Re 2016-1 issuance had already been priced down for a total loss by brokers and its maturity was fixed for February. But at this time we don’t have any clarity on whether this tranche will be extended, or perhaps pay out as it was the riskier layer of this particular issuance.

Heritage’s cat bond recoveries are set to be the largest reinsurance recovery made by any single sponsor and there will likely be more to come as the final determination of its hurricane Irma claims are made and how much of the principal pays out is decided.

Given the level of gross incurred loss Heritage has reported it seems likely a number of its cat bond tranches will pay out over the coming months, with these tranches looking likely to be the first among them given where they sat in the carriers reinsurance tower.

We’ll update you as and when any further information comes to light on these cat bonds and view details of all at-risk tranches in our directory of catastrophe bond losses and cat bonds considered at-risk.


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