Nationwide Mutual Insurance Company, the U.S. primary insurer, has allowed a partial redemption of one of the tranches of its Caelus Re V Ltd. (Series 2017-1) catastrophe bond amounting to $75 million of collateral released.
At the same time, Nationwide Mutual has opted to hold onto the collateral remaining from this cat bond deal for a now greatly prolonged period, with the notes and principal still left outstanding now all extended by a further four years.
Nationwide Mutual’s Caelus Re V 2017-1 catastrophe bond has responded to the insurers catastrophe loss activity in recent years, with the carrier making a number of reinsurance recoveries as loss payments have come due.
Nationwide first made reinsurance recoveries under this 2017 catastrophe bond issuance back in July 2019, as the impacts of losses from 2017 events including hurricanes Harvey & Irma, severe thunderstorms, California wildfires and winter storms all raised the insurers estimated aggregate ultimate net loss above the attachment for the reinsurance layer covered by first the Class D tranche of notes.
Five reinsurance recoveries have so far been made, all from the originally $75 million Class D and riskiest tranche of notes from the Caelus Re V 2017-1 cat bond issuance.
First a $10.73 million loss payment was received in July 2019, then a further $10.3 million loss payment in August 2019, a just under $3.54 million loss payment in September 2019, an $8.85m loss payment in October 2019 and most recently a fifth loss payment with an $8.457 million reinsurance recovery made in December 2019.
So reinsurance recoveries from the riskiest Class D tranche of Caelus Re 2017-1 notes reached a total of $41.9 million, which left the originally $75 million tranche with just over $33.13 million of principal left outstanding.
Recently, the Class A tranche of notes from this issuance was allowed to mature on schedule and investors will have had their principal returned.
Now, we’re told that half of the outstanding principal from the $150 million Class B tranche of notes of this issuance have been returned in a partial redemption, but the remaining $75 million of principal has now been retained and extended through to June 2024.
Similarly, the full $75 million of Caelus Re V 2017-1 Class C notes, which haven’t yet faced any losses, have also had their principal retained and maturity extended through to June 2024.
Finally, the remaining just over $33.13 million of the Class D notes, what is left after the reinsurance recoveries made so far, has also now had its maturity extended to June 2024.
It’s a long extension, but often under the terms of catastrophe bond deals the collateral can be held for prolonged periods to allow for ongoing loss development so that the sponsor can recognise any reinsurance recoveries that come due from the transaction.
We can’t imagine the Class B notes, being much more remote than both D (riskiest) and C (second riskiest) would be held for this long, so likely as Nationwide Mutual gains more clarity over its potential losses that qualify, it will allow for a further redemption of the remaining principal through the tranches, from top-down B to D.
The D tranche is not out of the water though and remains marked down almost fully on secondary cat bond pricing sheets, suggesting that investors and ILS funds expect that layer to be a total loss in time.
The Class C notes are also marked down for a total loss in the secondary market as well though, suggesting that this layer could attach soon as Nationwide next reports its losses. We’ll update you should we hear anything further.
The Class B notes are marked for around a 10% loss of the now $75 million of principal left outstanding, suggesting the market is being very cautious about the potential for Nationwide’s losses to keep rising up through its reinsurance tower and that even this layer is seen as carrying some risk still.
Cat bond investors holding these notes are not yet out of the woods, when it comes to potential losses and Nationwide will likely be hoping it can make further reinsurance recoveries from them, as the secondary market currently implies.
Some tranches of Nationwide’s 2018 Caelus Re V catastrophe bond also remain marked down in the secondary market, suggesting that those two are not considered safe from loss yet and this has further to run.
You can read all about the catastrophe bonds that have defaulted, faced a loss of principal, or that are considered at risk of loss in our directory detailing catastrophe bond defaults and potential payouts.