Heritage: Hurricane Milton loss could reach third-layer of reinsurance tower, surpass $450m

The CEO of Heritage Insurance Holdings, Inc., the Florida headquartered property and casualty insurer, has warned that its gross losses from recent hurricane Milton could reach the third layer of its reinsurance tower, suggesting a reasonable amount of risk capital will support its claims from the storm.

Heritage pre-announced its third-quarter catastrophe losses from hurricanes Debbie and Helene, saying these are expected to result in $48 million of net current accident quarter catastrophe losses being incurred.

Despite that third-quarter impact, Heritage still envisages reporting positive net income for the period.

With a $1.3 billion reinsurance tower available after its 2024 renewal and a southeast retention of just $40 million, Heritage is well-protected for the effects of hurricanes and other catastrophe events.

Heritage appears set to utilise a much greater proportion of the reinsurance tower for the fourth-quarter loss event hurricane Milton.

The insurer expects to incur roughly $57 million of net current accident quarter catastrophe losses from hurricane Milton.

Notably, Heritage said that 12 days after the storm it had received 5,435 claims and this reported claim count for hurricane Milton is slightly less than 50% of that experienced during hurricane Ian during the same time frame.

Ernie Garateix, CEO at Heritage highlighted the reinsurance tower and gave some idea of the losses its reinsurance partners may face.

He explained, “Overall, we are in a strong financial position and backed by a $1.30 billion reinsurance tower. We expect gross losses from hurricane Milton to possibly reach the third layer of our reinsurance tower which starts at $450 million and goes to $914 million. We continue to maintain a robust level of reinsurance coverage through year end 2024.

“Importantly, the strategic actions that we have taken over the last three years have helped to mitigate our losses from significant events like the three recent hurricanes. These actions which include rate adequacy, exposure management and underwriting discipline will enable Heritage to continue to support our customers as well as, we believe, further expand our business for years to come.”

So, with gross losses from hurricane Milton seen as potentially extending above the $450 million mark, it will attach some of Heritage’s southeast reinsurance protection.

Heritage has one southeastern state focused catastrophe bond in-force, the $100 million Citrus Re Ltd. (Series 2024-1) transaction issued in March 2024.

The riskier $50 million Class B tranche of notes from that Citrus Re 2024-1 cat bond attach at $560 million of losses and exhaust their reinsurance coverage at $700 million, while an also $50 million tranche of Class A notes sit on top, attaching at $700 million of losses and exhausting their reinsurance coverage at $800 million.

Given the sizes of these cat bond tranches at just $50 million each and the fact they share half or less of the reinsurance tower layers they occupy, even if Heritage’s losses from hurricane Milton reach above the $560 million level the attachment of the cat bonds would be relatively slow as gross losses went higher.

However, with the CEO saying it is only “possible” Heritage’s losses reach the third reinsurance layer, above $450 million, that is perhaps less likely without some relatively significant loss creep occurring.

It’s worth noting that in catastrophe bond broker pricing sheets, neither of these tranches of notes had been significantly marked down as of Friday, with only slight reductions in their marks that suggested the insurance-linked securities (ILS) community was not overly concerned about the risk of them attaching due to Milton.