Investors shouldered costs as St. Johns Putnam Re cat bond defaulted

The Putnam Re Pte. Ltd. (Series 2021-1) catastrophe bond that was sponsored by St. Johns Insurance Company fell to a default as a result of the insurers failure, and in an unusual turn of events investors holding the notes experienced a small loss of principal on redemption, as they shouldered some of the costs.

Keeping catastrophe bond investments remote to the creditworthiness of a sponsor has been considered a critical feature of the structure, we had assumed.

But in this case, we’re told that some of the early redemption related costs associated with the Putnam Re cat bond were paid by its investors through a small loss of principal after the notes default.

When a sponsor of a catastrophe bond fails it shouldn’t really impact the principal itself, with that investment collateralizing the reinsurance agreement and held in trust for the security and certainty of both the sponsor and the investors.

St. Johns Insurance failed and went into liquidation earlier this year, one of the Florida focused primary carriers that became dinsolvent and found its business untenable.

The insurer was ordered liquidated by a Florida court back in February and the Florida Department of Financial Services was appointed as its Receiver.

On notification of a default of the Putnam Re cat bond notes, investors were told that they wouldn’t receive all of their principal back, we understand.

The first issue was the failure to provide a premium payment, which was a default event under the related reinsurance agreement.

Sources said this was an issue that had been exacerbated by the fact the Putnam Re cat bond agreement meant only three months of premiums were paid upfront, where as it’s more typical to see six months funded in advance in the trust account.

Given the poor financial condition of the sponsor, St. Johns had been highlighted as an insurer facing solvency challenges for some time, it might have been prudent to require a larger upfront payment of premiums than a typical cat bond sponsor might pay, not less.

The reinsurance agreement was then terminated and no further premium payments made, which put investors on the back foot straight away, it seems, missing out on at least the one standard premium payment after St. Johns failed.

But in addition to this, we’re told that certain fees and expenses of the trustee were also held back from the eventual early redemption payment amount, which reduced the principal returned to holders of the Putnam Re cat bond.

As a result of all this, we’re told that of the originally $120 million in principal of the Putnam Re cat bond notes, only $119.25 million was, or is set to be, returned to investors.

Making this perhaps the first catastrophe bond in a long time where investors have faced a loss of principal that wasn’t actually related to losses caused by the perils covered by the notes.

It seems more could be done in the upfront terms of cat bonds, to protect investors from this sort of eventuality, and we’re sure investors and fund managers will be analysing deal terms closely to ensure situations like this can be avoided in future.