Investors braced for growing Caelus cat bond losses

The insurance-linked securities (ILS) investor base is braced for the potential for losses to grow from U.S. primary insurer Nationwide Mutual Insurance Company’s $375 million Caelus Re V Ltd. (Series 2017-1) catastrophe bond, as the insurers aggregated natural catastrophe losses rise further.

ILS and catastrophe bond investors have known they were on the hook for paying some of Nationwide’s losses, under the reinsurance agreements between the insurer and special purpose vehicle Caelus Re V Ltd., for some months now. But we understand that the expectation now is for a total loss of two tranches of the Series 2017-1 issuance, while there is also the potential for losses to trigger a third tranche as well, we’re now told.

As the situation now stands and including qualifying losses from winter storm Riley impacts, Nationwide Mutual’s ground-up aggregate catastrophe losses are around $2 billion, sources said.

Some investors we’ve spoken with said that there is an expectation that Nationwide Mutual will also likely be able to include some severe thunderstorm losses within its aggregate before the end of the current risk period, at May 31st, which suggests the ground-up loss total could creep even higher, which puts a third tranche of Caelus Re V 2017 cat bond notes at risk as well.

Nationwide’s aggregated natural catastrophe losses, from events including hurricanes Harvey and Irma, as well as severe thunderstorms and Californian wildfires, had already eaten almost all the way through the riskiest tranche of Caelus Re V cat bond notes back in December 2017.

Then the second tranche came into play, as loss estimates rose and Nationwide’s aggregated exposure to events in the current risk period increased, largely thanks to increased losses from the California wildfires, especially the Thomas wildfire in December.

In 2018 Nationwide Mutual has also been hit by losses from winter storms, another peril covered by its multi-peril aggregate Caelus Re V 2017-1 cat bond. Winter storm Riley is known to have increased the insurers aggregate catastrophe losses to around $2 billion, a figure which is now expected to be exceeded, according to ILS investors, as additional winter storm or spring convective storm losses are factored in.

The riskiest $75 million Class D tranche of notes issued by Caelus Re V attached at $1.5 billion and covered losses up to $1.75 billion for Nationwide, so are a total loss. The Class C tranche of notes sit directly above that, attaching at $1.75 billion and covering losses to $2 billion. So Class C is now assumed to be a total loss and secondary pricing sheets are beginning to reflect that assumption as well.

But if losses surpass the $2 billion mark, which we’re told is almost a given, then the $150 million Class B tranche of notes issues by Caelus Re V in the 2017 deal also come into play, as they attach at $2 billion and cover losses up to $2.5 billion for Nationwide.

With recent severe weather in the United States assumed to have caused a reasonable level of losses in Q1 and now also in Q2, there is a good chance that Nationwide may find it can add some of the impacts of recent convective storm events to its aggregate loss amount, triggering the Caelus Re V 2017-1 Class B notes as well.

Should there be further deterioration of its losses from prior events, such as the hurricanes and wildfires in 2017, then the aggregate catastrophe loss total could rise even further, placing more ILS investor capital at risk.

Currently, brokers secondary pricing sheets suggest that the $150 million of Caelus Re V 2017-1 Class B notes are definitely at-risk, with them marked down between 10% and 20% on sheets we’ve seen. So right now that suggests the potential for another $15 million to $30 million of cat bond losses to be added to the Class C and D tranches $150 million.

Investors will be watching future loss reports closely and the state of U.S. convective weather as well, to see whether Nationwide Mutual’s loss reports for specific events go up or down and whether any new weather events qualify, extending the level of losses the cat bond market suffers.

Also a reminder that Nationwide Mutual is back in the market with a new cat bond now, looking to replace some of the coverage that will be lost due to the default and payout of some tranches of its 2017 issuance.

The Caelus Re V 2017-1 cat bond tranches are all listed on our page detailing catastrophe bond defaults and potential payouts.

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