Nationwide’s aggregate rises on winter storms, Caelus cat bond losses possible

The catastrophe bond market looks set to face some additional losses under Caelus Re catastrophe bonds sponsored by US primary insurance giant Nationwide Mutual Insurance Company, as its aggregate risk period losses have risen after February’s US winter storms and Texas freeze.

Nationwide has notified investors in its outstanding Caelus Re catastrophe bonds that its aggregate ultimate losses from over the current annual risk period have now risen to a level that threatens some attachment points.

We’re told that Nationwide’s current aggregate risk period ultimate net loss has been reported at slightly over $1.5 billion.

Out of this, roughly $335 million of losses appears to have been added by the February winter storms and deep freeze that impacted a wide area of the United States and in particular the state of Texas.

Interestingly, the first catastrophe bond this rising aggregate loss number threatens, is a tranche of Nationwide’s most recent Caelus Re VI Ltd. (Series 2020-1 & 2020-2) cat bond issuance.

The Caelus Re VI 2020-2 Class C-2 notes, a $40 million layer providing the insurer annual aggregate reinsurance, have their attachment point set at $1.28 billion and cover a percentage of losses up to $1.575 billion, so the information we have sourced seems to suggest there is a strong chance of this tranche being a total loss.

Secondary cat bond market pricing sheets reflect that, with the Caelus Re VI 2020-2 Class C-2 notes priced down for bids in the single digits, implying the market believes at least a 90% loss of principal will occur.

The $75 million Series 2020-2 Class B-2 notes from this Caelus Re VI issuance, also annual aggregate and providing three years of reinsurance protection, could attach at $1.575 billion and cover losses to $1.775 billion, so also appear threatened. This tranche is also heavily marked down on broker pricing sheets, at levels implying a 75% loss of principal.

The also $75 million Series 2020-2 Class A-2 notes from this Caelus Re VI issuance are also marked down, by around 30%, but attach much higher at $1.775 billion, covering losses to $1.88 billion, so while exposed to Nationwide’s rising annual losses would need to see the aggregate ultimate loss rise much further.

But that’s just the most recent Caelus Re catastrophe bond issuance from Nationwide and the rising aggregate loss tally means investors in the other series are also under increasing threat of possible losses.

After this latest increase in its aggregate catastrophe losses, Nationwide has now extended the maturity on all of its $450 million of Caelus Re V Ltd. (Series 2018-1) catastrophe bonds, while at the same time keeping its 2017 vintage cat bonds also extended, but after allowing a further redemption of $60 million of principal.

Investors in Nationwide’s catastrophe bond program have already faced some losses over the last few years, as well as retention of collateral to allow for catastrophe loss development to continue.

When we last covered Nationwide’s loss-threatened Caelus Re catastrophe bonds, the insurer had allowed a partial redemption of the $150 million Class B tranche of its Caelus Re V Ltd. (Series 2017-1) catastrophe bond, amounting to $75 million of collateral released.

All of the Caelus Re V 2017-1 catastrophe bonds remaining notes have already had their maturity dates extended through to June 2024.

But now the insurer has allowed for another partial redemption, with $60 million of the remaining Class B tranche now also returned to investors, leaving just $15 million retained and extended from that layer.

Nationwide Mutual’s Caelus Re V 2017-1 catastrophe bond benefited the insurer with a number of reinsurance recoveries made as loss payments came due in recent years, all from the 2017/18 aggregate risk period, so including major hurricanes and wildfire events.

Nationwide first made reinsurance recoveries under this 2017 catastrophe bond issuance back in July 2019, when 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 point for the reinsurance layer covered by the cat bond, with the Class D tranche of notes the first to respond and payout.

Fast-forward and at least five reinsurance recoveries, that we know of, have so far been made, all reducing the remaining principal of 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 by Nationwide 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.

These reinsurance recoveries from the riskiest Class D tranche of Caelus Re 2017-1 cat bond notes totaled $41.9 million, which left the originally $75 million tranche with just over $33.13 million of principal left outstanding, which remains the status for this layer today.

The Series 2017-1 Class A tranche of notes from this Caelus Re V issuance was allowed to mature on schedule and investors had their principal returned.

With further returns of principal, including this most recent one to come to light, the originally $150 million Class B tranche of notes of the 2017-1 issuance have now been reduced to $15 million, with maturity extended through to June 2024.

The full $75 million of Caelus Re V 2017-1 Class C notes haven’t faced any losses so far, but also still have their principal retained and the maturity of the notes 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, continues to have its maturity extended to June 2024.

So, that’s the status of the Caelus Re V 2017-1 catastrophe bond, with now $123.13 of principal remaining extended and outstanding, albeit still trapped in case of further loss development.

Now, onto the $450 million Caelus Re V 2018-1 catastrophe bond, which has had all four of its Classes of notes extended in recent days, although to-date no reductions in principal, either in the way of reinsurance recoveries or in returns of capital to investors, have occurred as far as we know.

The Class A, B, C and D Series 2018-1 notes issued by Caelus Re V Ltd., which amount to $450 million in cat bonds, have all had their maturities extended through to June 7th 2025.

All four of these tranches of notes remain marked down in the secondary market, with the most recent movements in their price being related to the US winter storm and Texas freeze loss event in February 2021 and this latest increase in Nationwide’s ultimate over the latest risk period.

Given these 2018-1 cat bond notes from Caelus Re V have not faced an extension event previously, it seems reasonable to assume that this extension of maturity through till June 2025 is a result of the current risk period and the addition of these winter storm losses, rather than any continuation of loss development from prior years.

The latest annual aggregate risk period for the Caelus Re V 2018-1 cat bonds began in June 2020 and runs until the end of May 2021, so this extension is related to the aggregation of losses over this term, of which the winter storms are potentially the largest contributor, given Nationwide is said to have been quite exposed to those storms and the Texas freezing weather.

We don’t know the exact attachment points for the 2018-1 tranches for the current risk period, as they’ve likely been adjusted at each annual reset, but at their launch the $75 million Class D tranche of notes attached at $1.4 billion of losses, which was the lowest.

The $75 million of Caelus Re V 2018-1 Class D notes attached at $1.4 billion and provides annual aggregate reinsurance protection to $1.5 billion of losses, suggesting these notes are at definite risk of losses, even if the attachment has been adjusted somewhat at a reset (as it’s unlikely to be all that much higher).

This Class D tranche is currently marked down at levels suggesting a total loss of the $75 million of principal in broker secondary pricing sheets.

The $175 million of Caelus Re V 2018-1 Class C notes attached at $1.5 billion and provides annual aggregate reinsurance protection to $1.75 billion of losses, suggesting these notes are also under threat of attachment now.

This Class C tranche is currently marked down at levels suggesting a potential 60% to 80% loss of the $175 million of principal from this layer.

The $75 million of Caelus Re V 2018-1 Class B notes attached at $1.75 billion and provides annual aggregate reinsurance protection to $2 billion of losses, suggesting these notes face a greater threat, but are still not close to attaching at this time.

This Class B tranche is currently marked down at levels suggesting a potential 30% to 50% loss of the $75 million of principal from this layer.

Finally, the $125 million of Caelus Re V 2018-1 Class A notes attached at $2 billion and provides annual aggregate reinsurance protection to $2.5 billion of losses, suggesting these notes are less likely to attach without additional fresh losses in the current risk period, or quite significant loss creep to occur on prior events.

This Class A tranche is currently marked down at levels suggesting a potential 10% to 20% loss of the $125 million of principal from this layer, reflecting ongoing erosion of the aggregate deductible as Nationwide’s ultimate rises.

While the risk period is ongoing and recent catastrophe losses such as the winter storms are still developing, it does look like cat bond investors are readying for more losses of principal from Caelus Re catastrophe bonds, with Nationwide likely to benefit from more reinsurance recoveries as a result.

From the information we’ve sourced and the current secondary market pricing, it appears the current risk period including the winter storms may trigger a total loss for the $40 million of Caelus Re VI 2020-2 Class C-2 notes, as well as a partial loss looking possible for the $75 million Series 2020-2 Class B-2 notes issued by Caelus Re VI.

From the Caelus Re V 2018-1 issuance, it appears the $75 million of Class D notes may face a total loss of principal, while the $175 million of Class C notes may also face some principal loss, and the risk is rising for the $75 million Class B tranche as well.

As ever, we have to caveat all of this by saying that it is very hard to predict actual losses for catastrophe bonds when the risk period is ongoing, but the status above suggests further cat bond reinsurance recoveries are on the cards for Nationwide once this current annual risk period comes to a close.

The additional extension of the 2018-1 notes, which were due to mature at the end of this risk period, suggests development could be ongoing for some time and it could take a while for investors to gain a true picture of their losses, although they will of course mark them accordingly with the pricing sheets for the time being.

Details on other catastrophe bonds facing losses, deemed at risk, or already paid out, can be found in our Deal Directory here.