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Nelson Re cat bond saga comes to a close as notes mature


The catastrophe bond and insurance-linked securities market can put one of its more unfortunate moments to bed now as the Nelson Re Ltd. catastrophe bond, whose fate had been uncertain due to arbitration claims, has finally been allowed to mature. The notes issued by Nelson Re in 2008 have now matured and been delisted from the Cayman Islands Stock Exchange, while investors should already have received the full principal repayment from the deal.

The Nelson Re cat bond story has been one of the most messy in the cat bond markets relatively short history. It involved a disagreement between the sponsor Glacier Re and others including the administrator of the SPV over whether a loss payment was due under the terms of the notes and the cat bonds underlying reinsurance contracts.

The disagreement was taken to arbitration, the first time a cat bond disagreement like this had got to arbitration, with the claim boiling down to the sponsor 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 opinions.

During the disagreement and arbitration process the cat bond term was extended repeatedly to allow the debate over whether the Nelson Re notes faced losses or not to continue. Of course this meant that investors who had positions in Nelson Re could not recover that capital until the disagreement had been settled one way or the other.

Eventually, Glacier Re opted to cease the arbitration claims and the arbitration tribunal approved the petition to withdraw it. As a result of this the principal was due to be repaid in full to the cat bonds investors on 6th March 2013, without any reduction for catastrophe losses.

So now we really can close the chapter on the only cat bond to come under a long-running, formal dispute over a payout. Given that we have over 275 transactions listed in our Deal Directory it’s testament to the markets professionalism that we’ve only seen such a dispute occur the once in the markets history. Sponsors and investors alike watch these disputes closely to learn from them and avoid repeating it by ensuring deal terms and conditions are modified and tightened. It’s natural for any market to see disputes occur but encouraging when you see markets learn from their mistakes and make efforts to avoid repeating them.

It’s also worth reminding readers that now Nelson Re has paid out and the notes fully matured the total return swap is no longer a feature of the catastrophe bond market.

Here’s a handy timeline of the history of the Nelson Re Ltd. saga:

15th July 2011: Glacier Re submit the proof of loss which shows Nelson Re investors to be liable for nearly $27m of claims. The proof of loss goes off to be verified by the deals administrator.

15th August 2011: Deloitte & Touche issues a letter saying they are waiting for further information from Glacier Re so that they can re-calculate the ultimate net loss and what would be payable by investors.

25th August 2011: Deloitte & Touche issue another letter saying that they are unable to calculate the loss as they are, and we quote from Moody’s report: “Awaiting resolution between Nelson Re and Glacier Re on whether certain underlying policies that incepted in 2008 prior to June 7, 2008, and which were not initial modeled contracts, are covered under the reinsurance agreement.”

26th August 2011: Deloitte & Touche issued another letter saying that they couldn’t complete the calculations and hence could not validate Glacier Re’s request for reduced interest payments.

29th August 2011: Glacier Re extend the agreement with Nelson Re for another three months until 6th December. We assume this is so they can continue to try to validate their proof of loss.

January 2012: Glacier Re takes Nelson Re Ltd. to arbitration seeking a $20m settlement.

May 2012: Nelson Re gets extended once again as arbitration makes no progress.

February 2013: Nelson Re arbitration withdrawn, notes upgraded, principal to be repaid in full.

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