The maturity date has been extended for one of the classes of notes issued under the Herbie Re Ltd. catastrophe bond program, which is sponsored by Specialty insurance and reinsurance company Fidelis.
Fidelis Insurance has sponsored four catastrophe bond take-downs under the Herbie Re Ltd. program, together delivering it $630 million of multi-year and peril fully-collateralized retrocessional reinsurance protection, all on an industry loss trigger basis.
Some of Fidelis’ Herbie Re catastrophe bonds had been marked down in the wake of hurricane Ian’s impacts last September.
Now, sources have told Artemis that one tranche of notes in particular is seen as likely to face losses, with the maturity now extended for the notes to allow for further development of the hurricane Ian industry loss.
It is the riskiest Class C tranche of notes from the Herbie Re Ltd. (Series 2020-2) issuance, that is considered at-risk and we’re told assumed its investors are already facing some loss of principal.
The Class C tranche of notes is only relatively small, at $25 million in size, the smallest piece of the $275 million issuance that is Fidelis’ largest Herbie Re cat bond to-date.
But it is the riskiest layer of notes in that Herbie Re 2020-2 cat bond issuance and sources tell us this has likely already attached due to the industry losses from hurricane Ian, with the question now being how much of its principal could be eroded and recovered by Fidelis under a retro reinsurance agreement.
The Herbie Re 2020-2 Class C cat bond notes attach at a PCS industry loss level of $35 billion and cover losses up to $75 billion.
Right now, these notes are marked down around 50% in the secondary market, on the bid side, suggesting investors and broker-dealers currently anticipate a roughly 50% loss of principal.
Which we’re told also aligns with the level of industry losses reported so far for hurricane Ian.
Fidelis has elected to extend the maturity of these Class C notes, which had been due to mature earlier this month. The maturity date has now been pushed out to by three years, with an extension notice sent to investors in the cat bond at the beginning of this month, pushing the scheduled maturity out to early January 2026, sources explained.
One source suggested a partial recovery has already been made by Fidelis, but we cannot confirm. However, pricing data Artemis has seen, suggests the limit outstanding could have dropped from the initial $25 million to roughly $18.7 million, suggesting a partial recovery of around 25% of principal could already have occurred.
Of Fidelis’ other Herbie Re cat bond issues, the next most marked down at this stage are the Class A notes from the Herbie Re Ltd. (Series 2021-1) deal.
These notes are marked down for bids of around 70 cents on the dollar, so a roughly 30% mark-down at this stage.
These Herbie Re 2021-1 Class A notes provide aggregate coverage and have loss caps in place, but the hurricane Ian contribution will already have hit the loss cap for named storm, at $35 billion, meaning any other qualifying events (of which there have been a few) will be aggregating up to the attachment point which is at $50 billion.
Hence it’s no surprise these notes are also considered at some risk of possible losses.
The hurricane Ian industry loss estimate will continue to develop, so it could be some time before investors in the Herbie Re notes that are affected understand the full scope of reinsurance recoveries Fidelis can make from the catastrophe bond.
As ever, details are scarce when it comes to recoveries made under catastrophe bonds.
But in this case, it appears Fidelis’ Herbie Re series are acting as intended, providing a valuable source of reinsurance against significant catastrophe loss events, while the extension allows the sponsor to give time for qualifying loss events to further develop.
You can view details of many catastrophe bond defaults and losses in our Directory.
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