Nelson Re investors given advance notice of potential trigger as notes are downgraded

During a conference call with investors in troubled catastrophe bond Nelson Re (see STORM issue 49), ceding insurer Glacier Re has warned that the deal's US$67.5m Class G notes could be triggered as early as Q1 next year. As a result, Moody's has downgraded the Class G notes to Ca from B3 and assigned a developing outlook to the deal.

Glenn Campbell, cfo Glacier Reinsurance, told investors on 18 November: "The purpose of today's call is to provide updated information about Glacier's Ike-related losses and to outline the potential impact that such losses may have on the Class G notes. We should note that any information that Glacier provides today is being made on a voluntary basis in the interest of updating noteholders in a proactive manner."

Campbell continued: "As of 30 September 2009, we estimate that Glacier's ultimate net loss under the Class G Reinsurance Agreement was approximately US$123m, which is based on Glacier's actual paid losses under the subject business and the application of the adjustment factors. As of 30 September 2009, Glacier's total actual paid losses due to Hurricane Ike were approximately US$52m and its actual paid losses under the subject business covered by the Class G Reinsurance Agreement were approximately US$29m. We expect Glacier's actual paid losses to increase in the near- and medium-term."

Based on available data, the expectation is that Glacier's ultimate net loss as defined in the deal documentation will continue to increase as covered claims are paid and will trigger payments under the related Class G Reinsurance Agreement in due course. Although Glacier has not submitted a formal proof of loss claim to Nelson Re (nor can it until the ultimate net loss exceeds amounts giving rise to payments under the Class G Reinsurance Agreement), the firm says it may be in a position to do so during the first quarter of 2010.

"While we do not know what the ultimate impact will be on Nelson Re and the Class G noteholders, we caution that the Class G notes may suffer a significant loss," Campbell said.

He added: "Any loss information that we have provided today is preliminary and subject to adjustment as Glacier's paid losses continue to increase. As is often the case with very large industry events like Hurricane Ike, we expect Glacier's estimates to continue to develop over time as our cedants further establish and communicate their actual losses to us."

Moody's says its downgrade to a Ca rating on the Class G securities assumes that the notes will attach and that recovery of promised principal and interest will be less than 60%. The developing outlook reflects the possibility that ultimate recoveries could be significantly better or worse than contemplated. The extent of ultimate recoveries remains very uncertain at this point, as ceding companies continue to report losses to Glacier and Glacier continues to pay out losses.

In the same action, Moody's has placed the US$45m Class H and US$67.5m Class I notes on review for possible downgrade due to recent organisational changes at Glacier Re (and not because of incurred losses). Glacier's ceo recently resigned and was replaced by a non-executive director, who comes from hedge fund HBK Capital Management, one of Glacier's founding shareholders.

The rating agency says: "Although Glacier announced today in a public statement that it remains committed to the European reinsurance market, it is unclear how Glacier's clients will interpret recent management changes heading into 1 January renewals and what impact this may have on the quality of business ceded to Nelson Re. Moody's expects to speak with management after January renewals to assess the characteristics and quality of the bound portfolio. If the portfolio remains largely consistent with that contemplated when the ratings were originally assigned, Moody's would likely confirm the Class H and Class I ratings at their current levels."

The rating agency explains that Nelson Re issued the Class G, H and I notes in June 2008 as a way for noteholders to provide per occurrence excess-of-loss reinsurance to Glacier Re for US hurricane/earthquake events (Class G) and European windstorm events (Class H and I).

MP