Another outstanding catastrophe bond has been highlighted as being particularly at risk following the recent hurricane loss events, as ILS investor sentiment and trades suggest one tranche of Argo Group’s Loma Reinsurance (Bermuda) Ltd. (Series 2013-1) multi-peril cat bond is among those that could trigger.
The Loma Re Bermuda 2013 cat bond is an annual aggregate coverage, providing Argo Group and its subsidiaries with both reinsurance and retrocession against losses from tropical cyclones, earthquakes and severe thunderstorms.
The tropical cyclone coverage will be facing losses from all three of the major hurricanes of recent weeks, as the covered area includes the typical U.S. hurricane exposed states and also the island of Puerto Rico.
So that means the Loma Re Bermuda 2013 cat bond could be aggregating losses from each of hurricanes Harvey, Irma and Maria and with the transaction also covering U.S. severe thunderstorm risks there is also a chance that some of the convective weather earlier this year could also have eaten into the aggregate retention.
A $65 million Class C tranche of notes issued by Loma Re Bermuda in this 2013 cat bond deal is deemed the one at risk, given it has the lowest attachment point and highest expected loss. At launch this tranche featured an initial attachment point of $225m, a base expected loss of 7.95% and paid investors a coupon of 17%, but since then the attachment point could have been reset even lower, thus raising the risk.
The notes feature a novel dual trigger, designed to provide both reinsurance and retrocession coverage to Argo Group companies.
The trigger combines annual aggregate ultimate net losses from primary insurance arms Argo Group U.S. and Lloyd’s Syndicate 1200, with PCS reported industry losses weighted by region and size of loss designed to represent Argo Re’s losses.
Given the magnitude of losses expected from the three hurricane events of recent weeks, it is easy to see how investors in this cat bond tranche might be becoming a little nervous about the potential for it to be triggered and payout, especially as it covers Puerto Rico hurricane losses on an industry estimate basis.
Argo has to retain at least 10% of the annual aggregate loss and each event has a $15 million franchise deductible, but clearly Argo’s primary and reinsurance arms are exposed to all three hurricanes and the losses will easily exceed the deductibles, making it perhaps a waiting game for investors now.
The Loma Re Bermuda 2013-1 Class C notes are currently priced for bids anywhere between 65 and 75, across a number of secondary cat bond broker pricing sheets we’ve seen.
But more telling than the pricing down of the notes in broker secondary sheets, which reflect a rough estimation that there is a 30% chance this cat bond faces losses once the losses from all three hurricanes are revealed, is the fact that cat bond investors have been trading the notes and the levels the notes traded at have been falling in recent days.
The Loma Re 2013 Class C notes traded at 75 on September 28th 2017, then down at 68 on September 29th and then fell further to trade at just 60 cents on the dollar yesterday, October 2nd.
So the cat bond investor price expectations for the Loma Re Bermuda 2013 Class C notes have now fallen to below the level where the brokers priced these cat bond notes at the end of last week, which suggests that something in recent days may have triggered investors holding these bonds to look to sell.
That could be the PCS estimates of industry losses for hurricanes Harvey and Irma, as well as the risk modeller estimates of losses for hurricane Maria, which will enable investors to work out roughly how losses are aggregating under this tranche of reinsurance protection for Argo.
Historically, Argo Group suffered $83 million of losses for hurricane Ike, $56 million for superstorm Sandy, $23 million for hurricane Gustav and $12 million for hurricane Irene. All three of this year’s hurricanes could impact Argo Group as much as Ike did, which alone would get it close to the $225 million trigger point for this cat bond.
Until Argo releases some notification of its own ultimate net losses from the recent hurricanes it will be very difficult for investors to assess whether these notes are truly at risk.
At this stage though, it seems that at least some cat bond investors find holding the Loma Re Bermuda 2013 Class C notes too risky given the potential for this tranche to face a loss.
Of course this isn’t the only catastrophe bond tranche deemed at risk of an aggregation of losses from these hurricanes, a number of others are also potentially threatened, including some tranches of Everest Re sponsored Kilimanjaro Re notes, and other retro aggregate cat bonds from the likes of XL Group.