Bond insurer’s ILS another first for Bermuda

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  • First of its kind deal: Seán McCarthy, chief executive officer of BAM

    First of its kind deal: Seán McCarthy, chief executive officer of BAM


Bermuda’s insurance-linked securities market has added another feather to its cap with a “first of its kind” $100 million issuance backing a US insurer of municipal bonds.

Fidus Re Ltd, a Bermudian special purpose insurer, will use the proceeds from the sale of notes for a collateralised reinsurance agreement between Fidus and sponsor Build America Mutual Assurance Company, or BAM.

Most ILS provide capacity for natural disaster reinsurance and the Fidus transaction is believed to be the first securitised transfer of financial guarantee risk to capital market investors.

The news came in the same week that another new Bermudian special purpose insurer, Bellemeade Re 2018-1 Ltd, provided more than $374 million of reinsurance cover for Arch Capital’s mortgage insurance business on an indemnity basis.

It is not the first time Bermudian-based Arch has gone to the capital markets for mortgage reinsurance coverage. Altogether, four Bellemeade transactions have provided more than $1.3 billion of reinsurance protection for loans representing more than $117 billion of unpaid principal balance.

New York-based BAM is a mutual bond insurer whose members are US cities and states. BAM provides them with financial guarantees that lowers their cost of borrowing.

Bermudian-based White Mountains Insurance Group Ltd provided initial capital for BAM, which was launched in 2012.

“As a mutual insurer, BAM was designed to generate unparalleled capital strength to support its guaranty and benefit our investors and issuer members,” Seán McCarthy, chief executive officer of BAM, said.

“We have delivered on that promise with capital strength well in excess of rating agency and regulatory requirements.

“This transaction, the first of its kind, is a creative way for us to expand that surplus even further at an attractive price, which speaks to the quality of BAM’s insured portfolio and the strength of BAM’s position in the marketplace.”

The reinsurance protection provided by Fidus Re is scheduled to become effective during the second quarter of 2018.

Through March 31, BAM insured more than $46 billion of municipal bonds. BAM-insured bonds are rated AA with a stable outlook by S&P Global Ratings.

Arch-sponsored Bellemeade Re 2018-1 Ltd is funding its reinsurance obligations through the issuance of three classes of amortising notes with 10-year maturities.

Andrew Rippert, CEO of Arch’s Global Mortgage Group, said: “Executing transactions like this on a programmatic basis is a critical part of running a sustainable mortgage guaranty business.

“Not only does it provide us with catastrophic risk protection, it also gives us timely feedback from unbiased third parties on how they view the risk in the US mortgage market.”

According to leading ILS market-tracking website Artemis.bm, a record $12.6 billion of new capital was brought into the booming sector last year, with outstanding ILS surpassing $31 billion for the first time by the end of 2017.

So far this year Artemis has tracked a further $4.54 billion of new issuance, raising the outstanding market to $32.38 billion.

Bermuda is a leading ILS domicile, accounting for about three-quarters of global issuance, much of it through special purpose insurers with notes listed on the Bermuda Stock Exchange.

Several reinsurers have built their own divisions to manage third-party capital, while law firms, fund managers and administrators, and risk advisers are also benefiting from the industry.

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Published Apr 20, 2018 at 8:00 am (Updated Apr 20, 2018 at 12:05 am)

Bond insurer’s ILS another first for Bermuda

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