Fidus Re Ltd. (Series 2018-1)

This Fidus Re Ltd. (Series 2018-1) transaction is the first time financial guarantee insurance risks are being transferred to capital market investors through a catastrophe bond-like insurance-linked securities (ILS) arrangement.

Fidus Re Ltd. is a Bermuda special purpose insurer (SPI) established to issue and sell notes to investors with the proceeds used to collateralize excess of loss reinsurance agreements between Fidus Re and the sponsor, which is financial guarantee specialist insurer Build America Mutual Assurance Company.

We understand that a single $100 million tranche of notes are being offered to investors, some of which are destined to be ILS funds and the typical ILS suspects, but we’re also told that the investor base for a financial guarantee ILS transaction could be a little broader, as other specialist investors may be attracted to the deal.

Fidus Re Ltd. will issue a $100 million Class A tranche of notes. The notes will have a twelve-year term, so will provide the sponsor with reinsurance across a long duration. The notes are callable after five years, we understand.

The notes will provide reinsurance against losses on a pre-defined portion of Build America Mutual Assurance Company’s financial guarantee insurance portfolio, and will cover losses on an aggregate basis above an attachment point of $165 million of losses.

The covered portfolio includes 95% of Build America Mutual’s U.S. public finance financial guaranty policies issued through December 31st 2017, but excludes any surety policies and all exposures rated below investment grade, according to Kroll Bond Rating Agency which has rated the Class A notes as ‘AA’ grade.

Kroll also explained that only those amounts of insured principal and interest that come due through the 12 year term are covered under the reinsurance agreement, to the extent losses during this period exceed $165 million.

The covered portfolio is granular, geographically diverse, and is not exposed to higher risk sectors of the U.S. municipal market such as healthcare, housing, and private higher education, Kroll also said.

Build America Mutual only guarantee’s U.S. municipal bonds from issuers that deliver essential public services, so the bonds themselves are typically lower risk, lower volatility and has a higher credit rating.

Given the risks covered this is of course not an ILS transaction where the resulting asset can be said to have a very low correlation with broader financial factors, given the underlying insurance covers the risk of municipal bond defaults.

Build America Mutual will take its share of any losses within the layer of reinsurance that Fidus Re covers.

Fidus Re will cover 90% of all net paid claims exceeding the $165 million attachment point up to a maximum payout of $100 million, while Build America Mutual will pay the remaining 10% share.