Loma Reinsurance (Bermuda) Ltd. (Series 2013-1)

For its third catastrophe bond deal Argo Group has established a new Bermuda domiciled special purpose insurer, Loma Reinsurance (Bermuda) Ltd. This is Argo’s first transaction for two years, since December 2011.

In this first Series 2013-1 issuance through Loma Reinsurance (Bermuda) Ltd. Argo is seeking a four-year source of reinsurance and retrocessional protection from capital market investors against tropical cyclones, U.S. earthquakes and U.S. severe thunderstorms on an annual aggregate basis, we understand. The preliminary size of the deal is said to be at least $100m.

We’re told that the transaction uses a novel trigger, which we believe to be the first of its kind in a 144A cat bond issuance, a combined indemnity and industry loss trigger. We’re told that the trigger will be derived from the sum of ultimate net loss to Argo’s U.S. business and Syndicate 1200 and insurance industry losses, as reported by Property Claim Services (PCS), weighted by region and the amount of industry losses attributable to Argo Re.

That’s an interesting trigger construction, which perhaps seeks to reduce basis risk against the industry loss measure but at the same time ensure that coverage is sufficiently broad on an industry loss basis to cover all eventual scenarios where by Argo Re would become responsible for paying its insureds claims. It also allows Argo to combine reinsurance for its insurance businesses and retro for Argo Re within a single transaction.

Argo will retain a 10% share of losses within each risk period, we understand and a franchise deductible of $15m is applied. The ultimate beneficiaries of this cat bond will be Argo Group subsidiaries Argonaut Insurance, Argo Re and Lloyd’s Syndicate 1200.

Three classes of notes are being issued, we understand, a Class A tranche with an attachment point of $425m and exhaustion at $475m, Class B with an attachment point of $325m and exhaustion at $425m and Class C with an attachment point of $225m and exhaustion at $325m. That suggests that this deal could grow to $250m across the three tranches if investor demand allows.

The Class A notes have an attachment probability of 4.13%, an expected loss of 3.77%, an exhaustion probability of 3.43% and are being offered with price guidance of 10.5% to 11.5%.

The Class B notes have an attachment probability of 6.04%, an expected loss of 5.02%, an exhaustion probability of 4.13% and are being offered with price guidance of 12.75% to 13.75%.

Finally, the Class C notes have an attachment probability of 10.32%, an expected loss of 7.95%, an exhaustion probability of 6.04% and are being offered with price guidance of 17.5% (no guidance range offered with this tranche we are told).

The transaction features a variable reset mechanism, allowing Argo more flexibility should it opt to adjust the coverage provided by this layer during the term of the cat bond deal.

Update 1: This cat bond transaction has grown in size by 65% while marketing, from a target issuance size of $100m when the deal launched to now offer $165m of notes.

The three tranches of notes being offered by Loma Re (Bermuda) have all seen pricing decline to below the lower end of the originally marketed ranges. The individual tranches of notes were not sized when the deal launched.

The Class A tranche is currently $25m in size. It launched with price guidance of 10.5% to 11.5%, but this has declined to a range of 9.75% to 10.5%.

The Class B tranche is $75m in size. This tranche launched with price guidance of 12.75% to 13.75%, but this range has dropped to 12% to 12.75%.

The Class C tranche of notes is $65m in size. This tranche launched with price guidance of 17.5% but is now being offered with guidance of 17% to 17.5%.

Update 2: The latest Loma Re cat bond has grown again, but only slightly by $7m, increasing to $172m in size. At the same time, the three tranches of notes being offered by Loma Re (Bermuda) have all seen pricing settle at the bottom of the reduced guidance ranges.

The Class A tranche launched with price guidance of 10.5% to 11.5%, which was reduced to a range of 9.75% to 10.5%. Pricing has now settled at 9.75%, a reduction of over 11% from the mid-point of the launch range.

The Class B tranche launched with price guidance of 12.75% to 13.75%, which was lowered to 12% to 12.75%. Pricing settled at 12%, a reduction of over 9% from the launch price guidance mid-point.

The Class C tranche launched with price guidance of 17.5%, which was subsequently reduced to guidance of 17% to 17.5%. Pricing settled at 17%, a small reduction of about 3% from the launch guidance.

Update, 24th October 2017:

Following hurricanes Harvey, Irma and Maria the Loma Re 2013-1 catastrophe bond is likely to be triggered and at least one class of notes face a loss.

Sources said that based on a published loss report featuring Argo’s qualifying indemnity losses, the likelihood is that the riskiest $65 million Class C tranche of notes are a total loss and there is a chance that the $75 million Class B tranche, which sits above, could also begin to be eaten into.

Argo has reported a qualifying indemnity loss of $267.7 million, sources said, which is enough to eat into the Class C notes that attach at $240 million.

Based on initial calculations, the industry loss component is likely to contribute another $75.8 million, based on preliminary estimates.

Adding together the indemnity and industry loss components of the loss estimates gives a total of $343.5 million, which would exhaust the $65 million of Class C notes and eat $3.5 million into the $75 million Class B layer as well.

Note: These loss estimates are based on preliminary information from Artemis’ sources and our own calculations using initial estimates, therefore subject to change.

Update, 10th January 2018:

Argo Group elected to extend the maturity of the most at-risk $65 million of Class C notes, to allow for loss development to complete.

At the same time the re/insurer allowed the Class A and B tranches of notes to mature and noteholders received their full principal back, as it became clear that these two tranches of notes would not face any loss.

The $65 million Class C tranche of notes have been extened to April 8th 2018 to allow for further loss development and estimates to come in. Sources suggest these notes holders are likely to lose the majority of their principal and say the chances of noteholders receiving much back is slim.

Update, 5th April 2018:

The $65 million Class C tranche has had its maturity extended again to July 8th 2018, to allow for further loss development. The secondary prices for the tranche are now sitting for bids of around 55 to 60, suggesting at worst a 45% loss of principal based on the latest loss estimates.

Update – Jan 4th 2019:

The remaining $65 million of notes from Loma Re’s 2013-1 Class C tranche have been extended again, to allow for continue loss development, with maturity now set for April 8th 2019.

Update – Sep 13th 2019:

Argo has elected to extend the maturity date of the Loma Re 2013-1 Class C notes further to October 8th 2019, in the hope of claiming on the reinsurance protection they provide once loss development has completed. The notes are marked down for bids of roughly 40 cents on the dollar.

Update – Mar 5th, 2020:

The $65 million of outstanding Class C notes have had their maturity extended further again to April 8th 2020, as loss development continues.

The notes are now marked down in the secondary market for bids of around 20, suggesting a roughly 80% loss of principal is expected by investors.