BAM secures $150m Fidus Re 2022 financial guarantee ILS

Build America Mutual Assurance Company, the financial guarantee and municipal bond specialist, has returned to the insurance-linked securities (ILS) market and secured another $150 million of collateralized reinsurance through a new Fidus Re Ltd. (Series 2022-1) securitization and note issuance.

This is the third securitization of financial guarantee insurance risks sponsored by Build America Mutual, as the insurer continues to put the capital markets at the heart of its reinsurance arrangements and utilises catastrophe bond technology to achieve that.

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

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

Build America Mutual (BAM) returned in 2021 with a larger $150 million Fidus Re Ltd. (Series 2021-1) deal, extending the capital markets participation in its reinsurance tower on a fully-collateralized basis.

Now, BAM has returned again, to place another $150 million of this time Series 2022-1 notes with capital market investors, with the proceeds of that sale collateralizing a reinsurance agreement between its Fidus Re Ltd. special purpose vehicle and the insurer.

Fidus Re Ltd. is a Bermuda-based special purpose insurer (SPI) that issues 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.

The $150 million of Series 2022-1 Class A notes are exposed to losses to BAM’s financial guarantee insurance business, on an indemnity trigger basis.

These are long-tenure ILS deals, with this latest Fidus Re 2022-1 issuance having maturity set for the end of 2024, so providing almost 12 years of fully-collateralized financial guarantee reinsurance to sponsor BAM, the same tenure as the previous two Fidus Re deals.

The long-tenure helps Build America Mutual to lock-in reinsurance protection from the institutional markets, as a source of differentiated and efficient risk capital to back its growing financial guarantee underwriting business.

With this latest Fidus Re 2022-1 financial guarantee ILS deal now live, BAM said that its claims-paying resources total more than $1.4 billion.

BAM calls Fidus Re an “innovative tool for mutual insurers to access the capital markets” with trusts fully collateralized by assets held in money market funds, and the coverage funded by the sale of Series 2022-1 insurance-linked notes by Fidus Re.

As with the last Fidus Re issuance in 2021, for the Series 2022-1 notes, BAM has again opted to secure a rating, using rating agency KBRA to secure ‘AA’ ratings for the new $150 million issuance of insurance-linked notes.

Seán W. McCarthy, Chief Executive Officer of BAM, explained,  “The latest Fidus Re transaction demonstrates BAM’s focus on serving our member issuers and investor stakeholders by maintaining excellent financial strength.”

For 2022, the Fidus Re transaction structure is materially the same as the prior deals.

Noteholders are exposed to losses above a $110 million retention on a covered portfolio, at which point they share 90% of losses across a $167 million layer of the tower above that.

The excess-of-loss reinsurance agreement sees the Fidus Re 2022-1 notes providing cover against aggregate losses which exceed that attachment point, across the pre-defined and importantly static portion of BAM’s inforce financial guarantee portfolio.

Each of the three Fidus Re financial guarantee ILS deals cover a different pre-defined and static portfolio of subject business made up of scheduled principal and interest payment on select bonds which have already been insured by BAM.

It’s good to see Build America Mutual persisting with its use of insurance-linked securities (ILS) technology to tap the capital markets appetite for insurance risk and secure collateralized reinsurance.

As we’ve said before, these are not going to appeal to every ILS fund and investor, given they can’t be said to be as non-correlating as catastrophe risk bonds, but they still have an appeal for institutional investors and some ILS funds with broader mandates and as rated securities can garner plenty of investor attention.

You can read all about this second financial guarantee ILS transaction, Fidus Re Ltd. (Series 2022-1), from Build America Mutual in our comprehensive ILS and catastrophe bond Deal Directory.