The saga of the Nelson Re Ltd. catastrophe bond and whether investors are to lose principal from the Class G notes or not continues to rumble on. We reported back in September that a disagreement had emerged between sponsor Glacier Reinsurance and the SPV’s administrator over whether a loss payment was due, as the administrator could not validate the proof of loss that Glacier Re submitted.
The administrator continued to say that further information was required to validate whether the affected policies were actually covered under the terms of the Nelson Re cat bond. As a result of the disagreement the transaction was extended a number of times to allow for time for the disagreement to be settled. It would seem that agreement has not been found and now sponsor Glacier Reinsurance has filed a request for arbitration to the International Chamber of Commerce Court of Arbitration.
The ICC arbitration service has agreed to this and sent the necessary requests to the legal teams of Glacier Re and Nelson Re. As the claimant, Glacier Re are claiming an amount not less than $20m plus 5% per annum of interest. This claim is to reimburse Glacier Re for what they claim are the payments due under the terms of the Nelson Re deal for claims arising from Hurricane Ike which have been reported but are still outstanding (so the very claims the disagreement began about).
The documents we’ve seen say that the $20m could grow as Glacier Re are not fully aware of the losses they face until they have to pay their claimants. Interestingly the documents also suggest that $20m may be an underestimation of the losses as Glacier has gathered information suggesting that it may ultimately submit claims in excess of $50m.
Essentially this arbitration boils down to Glacier Re’s opinion of how they should validate the size of loss and any claims under the terms of the Nelson Re cat bond versus the investors we believe. Glacier Re believe that they have submitted full proof of loss and that under the terms of the cat bond they should be due payment. The investors, communication through lawyers and the deals administrator believe not (hence the September issue regarding further details of the proof of loss being requested by the administrator). Arbitration should settle this one way or the other and it’s likely that one party will not be happy at the end of this.
What can we learn from this? Ensuring that cat bond transaction documentation is absolutely bullet-proof and explicit in the way it describes how losses qualify and how proof of loss is established, is essential so that there can be no ambiguity in the event of a qualifying catastrophe. Unfortunately this is where some indemnity cat bonds fall down as the proof of loss is reliant on information from the original sponsor of the transaction. Having third-party claims assessors involved could help but the best way to avoid cases like this is ensuring the issuance documentation is fully transparent and lacking in ambiguity.
We’ll update you if/when we hear more on the future of the Nelson Re arbitration.