Build America repeats Fidus Re financial guarantee ILS at larger $150m size

Build America Mutual Assurance Company has returned to the insurance-linked securities (ILS) market for its second securitization of financial guarantee insurance risks, with a larger $150 million Fidus Re Ltd. (Series 2021-1) deal.

Build America Mutual is a financial guarantee specialist insurer established by the National League of Cities with initial capital from White Mountains and focused on U.S. municipal-only bonds.

The company broke new ground in the ILS market in 2018 with its $100 million Fidus Re Ltd. (Series 2018-1) transaction, which was the first catastrophe bond like vehicle for transferring financial guarantee insurance risks to the capital markets.

The fully collateralized financial guarantee reinsurance secured through these deals is also novel as it is of such long tenure, with the first Fidus Re Ltd. deal having a twelve year term and this 2021-1 issuance also being almost twelve years in duration.

That enables Build America Mutual to lock-in long-term reinsurance capital from the institutional markets, as a source of efficient risk capital to back its growing financial guarantee underwriting business.

Fidus Re Ltd. is a Bermuda special purpose insurer (SPI) set up to issue and sell notes to investors, with the proceeds used to collateralize an excess of loss reinsurance agreement between Fidus Re and the sponsor, Build America Mutual Assurance Company.

For its second issuance, Fidus Re Ltd. issued a $150 million tranche of Series 2021-1 Class A notes, that were sold to investors.

The notes have a roughly twelve-year term, just like the first Fidus Re financial guarantee ILS deal, so provide the sponsor with reinsurance across a long duration.

Build America Mutual (BAM) said that the $150 million of fully collateralized reinsurance secured from Fidus Re Ltd. effectively expands its claims-paying resources to more than $1.1 billion.

“The substantial growth in claims-paying resources is the result of the continued execution of our long-term capital plan, which allows BAM to build unparalleled financial strength both through organic growth and periodically accessing the capital markets,” explained Seán W. McCarthy, Chief Executive Officer of BAM.

The 2018 financial guarantee ILS arrangement remains in force as well, so now BAM has $250 million of financial guarantee reinsurance, on a fully-collateralized and long-term basis from the capital markets and funded through the sale of insurance-linked notes through Fidus Re.

The new $150 million of 2021-1 notes issued by Fidus Re Ltd. will provide BAM with reinsurance against losses on a pre-defined portion of Build America Mutual Assurance Company’s financial guarantee insurance portfolio.

The Fidus Re 2021-1 ILS arrangement will cover 90% BAM’s claims on that portfolio, excess of $135 million, on an aggregate basis.

The subject business covered is made up of scheduled principal and interest payment on select bonds which were insured by BAM prior to October 31st 2020.

Interestingly, the subject business excludes any exposure thought to have had an elevated risk due to the COVID-19 pandemic.

Because of the risks covered, these Fidus Re ILS transactions are not typical, as the resulting ILS investable asset cannot really be said to have a very low correlation with broader financial factors, unlike catastrophe risks.

As a result, it’s perhaps more like the mortgage ILS deals we cover, in that it is an insurance-linked risk, issued to secure collateral for reinsurance purposes, but with some correlation factors that make it appealing to a different set of institutional investors to a catastrophe bond.

Another difference is in the rating, as these notes issued by Fidus Re are ‘AA’ rated by Kroll Bond Rating Agency (KBRA).

That can broaden the appeal to a much wider range of investors, as too can their long-tenure as well.

Of course, covering municipal bond insurance does mean there are other perils that could affect the notes, including catastrophe risk exposures at the tail.

It’s encouraging to see a second financial guarantee ILS transaction, issued in catastrophe bond-like form.

It signals a further expansion of the ILS market, with a new sponsor becoming a repeat sponsor, and likely more new investors discovering the sector as well.

You can read all about this second financial guarantee ILS transaction, Fidus Re Ltd. (Series 2021-1), from Build America Mutual in our comprehensive ILS and catastrophe bond Deal Directory.