Catastrophe bonds sponsored by specialty insurance and reinsurance company Fidelis Insurance Holdings Limited have been marked down by as much as 10%, or slightly more, as industry loss expectations for hurricane Ida rise, while some of the other exposed cat bonds have also seen more price declines.
In addition, some of the other more Ida-exposed cat bonds have been marked down further, including those providing reinsurance to FEMA’s National Flood Insurance Program.
The insurance and reinsurance market is now anticipating an industry loss of anywhere north of $20 billion, with top-end estimates including the Ida remnant related flooding damage in the north eastern states and the bill to the NFIP now rising above $35 billion.
In recent years and alongside its growth, Fidelis has expanded its use of third-party reinsurance capital, through its sidecar quota shares and third-party capital partnerships through Socium, but also with an increasingly important catastrophe bond program named Herbie Re.
Under the Herbie Re cat bond program Fidelis now has three issuances, featuring five tranches of cat bond notes and making up some $550 million of third-party investor backed retrocessional reinsurance capital that protects it against multiple catastrophe perils on a second-event and annual aggregate basis.
All of Fidelis’ Herbie Re cat bonds use an industry loss trigger, based on PCS reported data for any qualifying catastrophe events.
Fidelis’ first cat bond was the $125 million Herbie Re Ltd. (Series 2020-1) transaction, that provides it with second-event US named storm and earthquake protection on an industry loss basis.
Fidelis followed this up with a larger $275 million Herbie Re Ltd. (Series 2020-2), which also covers it against US named storm and earthquake losses on an industry loss trigger basis, but this time with the coverage being annual aggregate in nature.
The most recent cat bond from Fidelis was its $150 million worldwide multi-peril deal Herbie Re Ltd. (Series 2021-1), which is also annual aggregate in nature but covers practically all the global peak catastrophe perils.
Being an industry loss triggered series of cat bonds, it’s no surprise that as the market’s loss expectations for recent hurricane Ida have risen, these notes could become viewed as potentially affected.
In the case of the Herbie Re bonds, there are qualifying thresholds, in terms of the size of the industry loss, that must be surpassed for an event to be deemed applicable to the notes.
The first Herbie Re 2020-1 cat bond, which is a second-event cover, specifies that each event must pass a qualifying threshold of a $20 billion industry loss.
The second Herbie Re 2020-2 cat bond, which is an aggregate deal, needs each event to surpass a franchise deductible of $20 billion to qualify and to begin accumulating losses that would erode the deductible layer beneath the trigger for each tranche of notes.
The third Herbie Re 2021-1, which is also an aggregate deal, has a lower franchise deductible, at just $10 billion for a US named storm event, but also notably caps the contribution of a named storm loss at $35 billion.
In the latest cat bond market pricing sheets that we’ve seen, all dated as of Friday, we’ve seen the Herbie Re 2020-1 second-event notes marked down as much as 12 points, the 2021-1 aggregate notes marked down between low single digit points and as much as 9 points for the riskier Class C tranche that attaches lower down and finally, the Series 2021-1 notes from Herbie Re have been marked down around 5 points, it seems.
Mark downs vary depending on which sheet you look at, but in most cases these three cat bonds have seen their prices decline noticeably week-on-week.
It’s important to note these are all relatively small adjustments to the secondary price for these notes.
It seems likely that the driver of these mark-downs may be that the market is moving towards a view that a PCS loss estimate of above $20 billion for hurricane Ida is increasingly likely, given the increases in modellers loss estimates.
With that being a key figure for both the 2020-1 and 2020-2 Herbie Re cat bonds, it’s no surprise to see them marked down the most.
At or above that level of $20 billion, hurricane Ida would be deemed a qualifying event under the Herbie Re bonds, having exceeded the franchise deductible or per-event threshold and so begin to erode some of the notes aggregate retentions.
At this stage these mark-downs are likely precautionary, as the market watches the industry loss from hurricane Ida develop and waits for official figures under PCS’ catastrophe serial reporting process.
But the higher the figure ultimately rises, the greater the chance of the hurricane becoming a qualifying event under the Herbie Re cat bonds from Fidelis, as well as under any other industry-loss trigger catastrophe bonds.
Where PCS’ first estimate for the hurricane ends up could drive further declines in these or other industry loss trigger cat bonds, we’d imagine.
Some other cat bonds saw additional price movements this week, including some of the FloodSmart Re bonds whose prices fell further as the size of the NFIP’s loss continues to develop upwards. We explained last week that the NFIP’s reinsurance tower and therefore its cat bonds, are now on-watch for potential losses.
Some of the riskiest FloodSmart Re cat bond tranches are now marked as low as in the 50’s or 60’s, we understand, again dependent on which pricing sheets you look at.
The market is definitely anticipating the NFIP’s claims reaching close to where the cat bonds trigger, which provides further support for the idea that its traditional reinsurance program, at least, will face some losses from Ida.
In addition, Safepoint’s most recent Manatee Re cat bond also fell further on some pricing sheets, as the market continues to view that as one cat bond particularly at-risk from attaching due to hurricane Ida.
Our sources suggest Safepoint will be looking to make relatively significant reinsurance recoveries from its program for hurricane Ida, but whether that includes from the Manatee Re cat bond is at this stage less certain.