Nationwide in first $10.73m Caelus Re V cat bond reinsurance recovery

U.S. primary insurer Nationwide Mutual Insurance Company has made its first reinsurance recovery under the stricken Caelus Re catastrophe bond series, claiming $10.73 million from the highest risk Caelus Re V Ltd. (Series 2017-1) Class D tranche of notes.

A number of tranches of Nationwide’s $375 million Caelus Re V Ltd. Series 2017-1 catastrophe bond issuance have been expected to suffer losses, having been priced down in the secondary market for some months now.

The aggregate impacts of catastrophe loss events occurring in 2017, including hurricanes Harvey & Irma, as well as severe thunderstorms, California wildfires and winter storms, have all served to increase Nationwide’s estimated aggregate ultimate net losses over the last year or so, resulting in a strong chance of full default and significant reinsurance recoveries for Nationwide to some of the tranches.

The riskiest tranche of the Caelus Re V 2017 cat bond issuance is the $75 million of Class D notes, which at issue had an expected loss of 4.86%.

We understand that Nationwide’s reported estimate of aggregate UNL for the risk periods in question now stand far beyond where the exhaustion point for this tranche of notes stands.

So that suggests a full reinsurance recovery will be made at some point in the future, once the firm loss figures are in from Nationwide.

But for now the insurer has made a claim for a $10.73 million reinsurance recovery, or loss payment, under the Caelus Re V Series 2017-1 Class D tranche of notes, leaving just slightly under $64.27 million of the notes net principal still outstanding for now.

Sources told us that Nationwide’s estimated aggregate ultimate net losses for the annual risk period running from June 2017 now stand at just above $2.168 billion.

The figure actually fell slightly at an update as of the end of May, but it’s still far above where the exhaustion point sits for the Caelus Re V 2017 Class D notes.

In fact, we’re told the aggregate UNL is also above the exhaustion point for the Caelus Re V 2017-1 Class C notes, which sit above the D’s in the reinsurance tower for Nationwide.

As a result, the market is expecting a total loss of principal for the $75 million Class C notes as well.

In addition, our sources said that the Class B notes are also at risk, with the $150 million tranche of notes currently looking likely to lose as much as one-third of their outstanding principal.

The secondary market continues to suggest a higher loss than that for the Caelus Re V 2017-1 Class B tranche, with the notes priced for bids as low as 25 cents on the dollar, suggesting a roughly 75% loss of principal could be possible.

However, given the aggregate UNL figure reported by Nationwide reduced at the end of May, it is possible that the secondary price on these Class B notes may rise a little now, as the outlook for them looks slightly improved at this time.

Nevertheless, it seems given where the UNL figure stands that at least a total loss and reinsurance recovery is to be expected for the Caelus Re V 2017-1 Class C and D notes, with as much as one-third of the Class B set to face a loss as well.

In total that could be a $200 million reinsurance recovery coming for Nationwide (the full $75m for each of tranche C and D, plus as much as $50m for tranche B), which will be welcomed by the insurer and its stakeholders.

On top of this, some tranches of Nationwide’s $450 million Caelus Re V 2018-1 catastrophe bond issuance are also at risk of losses, due to the impacts of the 2018 year catastrophe events.

Aggregate losses threatening the Caelus 2018 cat bond are due to the California wildfires, hurricane Michael, hurricane Florence and a number of severe thunderstorm events, we understand.

Currently estimated aggregate ultimate net losses for the June 2018 and onwards annual risk period amount to just over $1.08 billion, while the attachment point for the notes sits at $1.4 billion currently, we’re told.

At this stage the riskiest $75 million Class D tranche are marked down in the secondary market on an expectation of a roughly 50% loss of principal, while the $175 million Class C tranche are marked for a 20% or so loss. It’s going to take some serious ongoing development for the triggers to be breached it appears, but after the experience with 2017 it seems investors are being cautious with these 2018 cat bond tranches.

It could be some time before any final loss amounts and reinsurance recoveries are fully understood for these 2018-1 Caelus Re V cat bond tranches.

We’ll update you as and when further details on Nationwide’s catastrophe losses and their impact on outstanding Caelus catastrophe bonds come to light.

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.