Covéa’s Hexagon III Re cat bond facing potential windstorm Ciarán loss

Artemis has learned from sources that the more junior €53 million Hexagon III Re Pte. Ltd. (Series 2021-1) Class B tranche of notes from Covéa Group’s 2021 catastrophe bond issuance could potentially be facing a hit to principal, as the insurers losses from November 2023’s European windstorm Ciarán rise.

We understand that a notification that Covéa Group’s losses from windstorm Ciarán had risen to roughly half the attachment point for these notes had previously been available, but that was simply to keep investors informed and did not imply any losses would necessarily be faced.

But, we’re now told an event notice for windstorm Ciarán has been filed in relation to the Hexagon III Re Pte. catastrophe bond and that it suggests a strong chance a loss of principal will be faced by holders of the €53 million of Class B notes.

The Class B notes from the Hexagon III Re catastrophe bond are more junior, sitting much lower down with an initial attachment at €50 million in losses and an expected loss at issuance of 8.05%.

At the time of their issuance, the notes demonstrated just how thin European windstorm reinsurance pricing can be, given they priced to pay investors a spread of just 11%.

The notes provide Covea companiess, which include three named insurers MMA IARD SA, MAAF Assurances SA and GMF Assurances as well as other entities within the Covéa Group, with coverage against losses from France windstorm, hail storm & other natural perils.

Between November 1st and 3rd 2023, windstorm Ciarán hammered France, Belgium, the United Kingdom, and the Netherlands, resulting in insurance and reinsurance market losses estimated to be around €2.043 billion by PERILS.

Which is not an enormous industry loss event, but with these Hexagon III Re Class B cat bond notes sitting low-down in the Covea reinsurance program, it appears they are now likely to be triggered and so could pay out.

Sources said that reports from the special purpose issuer suggest a reduced interest spread will now be paid on a portion of the notes, with indications that the potential erosion of principal could end up being around €11.2 million, based on the data currently available.

However, that is not finalised and development continues, we are told, so should Covéa’s ultimate net loss from windstorm Ciarán rise further, the erosion of principal could end up higher than that. Or, positive development could reduce any eventual losses to investors in the notes.

We’re told reported UNL from the event now amounts to €48.7 million, so just slightly below the attachment point for the notes, but that including growth factors expectations are this will rise and the reduction of principal could be seen if that does occur.

As a result, the principal has not yet been reduced, but we are told it is seen as likely to occur when the loss figures are finalised, meaning Covéa would then benefit from a reinsurance recovery under the terms of the Series 2021-1 Class B catastrophe bond notes issued by Hexagon III Re Pte. Ltd.

These event notices have only emerged this week, hence these cat bond notes have not yet been marked down in secondary pricing sheets.

But, it is safe to assume they will get marked down around the 20% mark or slightly more, when the cat bond broker pricing sheets are published for the weekend.

In fact, we’ve heard today of a speculative bid in the market for these notes, seeking to buy them at a roughly 60% discount to where they were priced a week ago. That bid seems unlikely to find a seller to match with at this time, but you never know.

Details of catastrophe bonds facing losses, deemed at risk, or already paid out, can be found in our cat bond losses Deal Directory here.

You can read all about this Hexagon III Re Pte. Ltd. (Series 2021-1) catastrophe bond from Covea Group and every other cat bond transaction in our Deal Directory.