An interesting situation has come about after Glacier Re, the Swiss based reinsurer, announced that it was putting itself voluntarily into run-off. On the 27th August Glacier Re announced that it had reviewed its strategic alternatives and decided to discontinue its underwriting operations and go into a self-managed run-off.
Glacier Re was the issuing sponsor of the Nelson Re catastrophe bond transactions and as such the rating agencies have been taking a look at how the run-off situation could affect the existing tranches of each insurance-linked security.
Moody’s have responded by downgrading the outlook for the following tranches of Nelson Re. $45m of Class H notes and $67.5m of Class I notes have both had their outlook downgraded to negative from stable. $67.5m of Class G notes have had their outlooks kept at developing while the situation is assessed. Classes H and I provided cover for European windstorm risks while Class G provided cover for U.S. hurricane and earthquake risks.
As part of the Nelson Re deal Glacier Re pays reinsurance premiums to Nelson Re Ltd. which it then passes on to investors who hold the bonds as interest. Moody’s notes that as Glacier Re business runs-off it will reduce some of the catastrophe risk to Nelson Re noteholders. However, Moody’s states that as the run-off continues Glacier Re could see less value from Nelson Re and that could lessen the incentive for Glacier Re to make its reinsurance payments. That would result in a strategic loss for the noteholders.
We feel that’s unlikely, but it is correct for Moody’s as a rating agency to make investors aware of this new risk. Moody’s say they have kept the ratings unchanged (despite the change in outlook) as they feel Glacier Re is still likely to honor its obligations as it’s in good financial health, regulations is strong in Switzerland and there is also reputation risk for leaders at Glacier Group should any strategic default occur.
The Class G notes have remained on a developing outlook as they are likely to be triggered due to losses from hurricane Ike anyway and therefore Glacier Re will have to continue to pay the reinsurance premiums if they are to recover paid losses from Nelson Re.
It’s one of the more complicated rating ammendments to a cat bond transaction that we’ve seen but good to see the rating agencies responding in a manner we’d expect.