Nationwide’s Caelus Re V 2017 cat bond looks set for losses

The $375 million Caelus Re V Ltd. (Series 2017-1) catastrophe bond, which was sponsored by U.S. primary insurer Nationwide Mutual Insurance Company in May and only came on-risk in June, looks set to face a loss as aggregated natural catastrophe claims have almost eaten through the riskiest tranche of notes.

Sources told us that an update to catastrophe loss estimates from Nationwide Mutual today shows that its aggregated losses in the current risk period have now reached approximately $1.77 billion and after accounting for a $50 million franchise deductible for one loss event, the qualifying aggregated losses are now approaching $1.73 billion.

The $75 million Class D tranche of notes issued by Caelus Re V are the riskiest, attaching at $1.5 billion and covering losses up to $1.75 billion.

As a result, based on where the loss estimate currently sits, it looks likely that this Caelus Re V 2017-1 Class D tranche of cat bond notes is heading for a total loss, which could add another $75 million to the 2017 ILS market loss toll.

This Caelus Re V cat bond had not been considered at risk from 2017 catastrophe events until this latest loss estimate update, we’re told, as Nationwide’s losses from events such as hurricanes Harvey and Irma had not been sufficiently large to trouble the trigger.

It transpires that the reason Nationwide’s aggregated catastrophe losses have risen to beyond the attachment point for the riskiest layer of Caelus Re V cat bond notes is the California wildfires, which look set to claim another cat bond scalp.

We’re told that Nationwide has reported a massive $1.23 billion estimated loss for the Tubb’s wildfire in California from October, a particularly large loss for an event that is estimated to have caused an insurance and reinsurance industry wide impact of around $10 billion.

Added to other events, including hurricanes Harvey and Irma, some severe thunderstorm losses and the other October wildfires, the overall estimate of qualifying losses from Nationwide now looks large enough to trigger and cause almost a total loss to the $75 million of 2017-1 Class D notes issued by Caelus Re V.

Nationwide is estimated to have a 4% market share of California wildfire exposed property premiums and the size of this loss estimate from the insurer could be a signal that other exposed companies may hike their initial estimates of losses considerably.

For example, USAA, which is also estimated to have around a 4% market share, had most recently pegged its California wildfire losses in a range between $387 million and $581 million. Should USAA’s loss estimate rise considerably it could put more of its outstanding Residential Re catastrophe bonds at risk.

USAA has already elected to extend the maturity for half of the principal of its per-occurrence Residential Re 2013-2 catastrophe bond due to the wildfires and the potential for them to cause losses to the notes. .

Other Residential Re cat bonds from USAA that are structured to provide aggregate reinsurance protection could potentially be considered at risk too, were USAA to take a rising California wildfire loss.

Nationwide’s loss estimates could also rise further, putting the $75 million Class C tranche of Caelus Re V notes, which sit above the Class D, at risk as well. Given these notes have an attachment point at $1.75 billion and cover losses up to $2 billion, they are very close to the trigger already and any further loss creep would begin to eat into the investors principal of this tranche.

As a result of these loss estimates, we’d imagine that secondary pricing sheets will mark the Caelus Re V 2017-1 Class D notes down significantly and likely the Class C notes will be marked down too, reflecting an increased risk of attachment.

One fact that could further exacerbate this situation is the ongoing wildfire risk in California.

We reported earlier today on the fact that a new wildfire in Ventura County California has the potential to add to primary insurers losses, which could result in further impacts, perhaps causing more ILS or catastrophe bond losses.

In a year when hurricane losses are heading towards $100 billion, the California wildfires are set to create almost as much disruption, in terms of actual losses to principal, for the catastrophe bond market it seems.

The size of Nationwide’s loss estimate for the Tubb’s wildfire could cause some alarm bells among reinsurers and ILS funds, as it may signal that loss estimates are going to rise for other re/insurers, perhaps causing more reinsurance and retrocession losses in this costly year.

Of course this will all add further pressure to the calls for reinsurance and retro pricing to increase at the renewals, after this heavy loss year.

It’s important to note that these are still loss estimates from Nationwide and other insurers, with the recent wildfires being only weeks ago. Hence loss estimates from the California wildfires could move down, just as easily as up, and these potential losses to catastrophe bonds are not yet confirmed.

Given the enhanced chance that this Caelus Re V Ltd. (Series 2017-1) cat bond will face some losses we’ve added it to our list of triggered and defaulted catastrophe bonds.

Join us in New York in February 2018 for our next ILS conference