According to Artemis’ market sources, an estimate of sponsor Argo Group’s losses suggests that the re/insurers Loma Reinsurance (Bermuda) Ltd. (Series 2013-1) multi-peril catastrophe bond has been triggered, with one tranche of notes likely to payout in full and another likely impaired.
The Loma Re Bermuda 2013 cat bond is an annual aggregate structure, providing Argo Group and subsidiaries with both reinsurance and retrocession against losses from tropical cyclones, earthquakes and severe thunderstorms.
The covered area for the Loma Re 2013 cat bond includes the typical U.S. hurricane exposed states and also the island of Puerto Rico, so the transaction faces qualifying losses from all three of the recent major catastrophe events, aggregating losses from each of hurricanes Harvey, Irma and Maria.
The notes feature a novel dual trigger, both indemnity and industry loss, designed to provide Argo Group companies with both reinsurance and retrocessional protection.
Annual aggregate ultimate net losses from Argo Group’s primary insurance arms, Argo Group U.S. and Lloyd’s Syndicate 1200, are combined with PCS reported industry losses weighted by region and size of loss, in a structure designed to represent Argo Re’s total business exposure.
Artemis has been told that the recently published loss estimate only includes Argo’s ultimate net losses that qualify under the terms of the cat bond as indemnity. The current figure across the three hurricane events is said to be $267.7 million.
The most risky $65 million Class C tranche of notes has an attachment point of $240 million and covers losses up to $340 million, we’re told. Then a $75 million Class B tranche of notes kick in, providing coverage from $340 million up to $440 million.
So based on the current estimate of ultimate net losses that qualify under the terms of the Loma Re 2013 cat bond deal, at $267.7 million the indemnity losses have already eaten $27.7 million of the way through the $65 million Class C tranche of notes.
That is with the industry index value taken as zero though, so once the industry losses are also factored in for the retrocessional coverage, our sources say that the Class C notes are likely to face a total loss and there is a high chance that the Class B note holders will face some losses too.
Our sources told us that the aggregated industry loss across the three hurricane events, using the factoring that needs to be applied under the Loma Re 2013 cat bond terms, amounts to roughly $76 million, which when added to the indemnity loss would give a combined $343.7 million qualifying loss to this cat bond.
At that level of loss, across both indemnity and industry index, the Class C tranche of notes would be a total loss and the Class B tranche would face a roughly $3.7 million loss of principal as well.
However, the industry loss index figure above is based on the initial estimates from PCS, we’re told, which most in the market expect will rise at the next reporting interval. So there is every chance that the Class B notes will face a larger loss, as industry loss estimates rise which most expect will be the case.
The Loma Re Bermuda 2013-1 Class C notes had been priced for bids ranging from as low as 10 and upwards on some broker pricing sheets, reflecting the expectation that this tranche could face a loss of principal. These notes had traded as low as 60 cents on the dollar as well, also reflecting investor nervousness about this deal.
Now that this loss estimate has been released we’re told that a loss to noteholders is on the cards, with investors in the Class C tranche definitely set for a loss, potentially a full one. The Class B tranche is assumed likely to be eaten into as well, by our sources, but updated industry loss index values are likely to be required before the full exposure to investors in this cat bond becomes better understood.
It’s important to note that this is a preliminary indemnity loss estimate and likely subject to change, and that the industry index contribution we describe above are based on the initial estimates via our sources and so cannot be confirmed at this time.
We’re adding the Loma Reinsurance (Bermuda) Ltd. (Series 2013-1) catastrophe bond from Argo Group to our listing of cat bond payouts and defaults, where you can find details of all catastrophe bonds triggered and payouts made, since the market began.