Caelus Re V Ltd. (Series 2017-1)

The latest multi-peril catastrophe bond from Nationwide Mutual Insurance Company

For this issuance, a new Cayman Islands special purpose insurer (SPI) Caelus Re V Ltd. has been established to issue to issue four tranches of notes which will be sold to ILS and capital market investors in order to fully collateralize reinsurance agreements between the SPI and sponsor Nationwide Mutual.

We understand from sources that the reinsurance coverage from this Caelus Re V 2017-1 cat bond will benefit Nationwide Mutual and its subsidiaries including Titan Insurance Company which is a dedicated auto insurers for the firm.

The four tranches of Series 2017-1 notes issued by Caelus Re V will provide Nationwide and its subsidiaries with a $300 million three-year source of collateralized reinsurance protection against losses from multiple U.S. perils, including U.S. named storm, earthquake, severe thunderstorm, winter storm, wildfire, meteorite impact, volcanic eruption, and other perils.

This is the first cat bond from Nationwide that has expanded its coverage to include other perils, which are identified as any other catastrophe event causing a loss to the firm that a reporting agency identifies as qualifying, we’re told.

Coverage from the four tranches of Caelus Re V cat bond notes will be on an indemnity trigger and annual aggregate basis, sources said, and the subject business includes personal, commercial and excess & surplus or specialty risks.

A currently $60 million tranche of Class A notes will cover losses from an attachment point of $2.5bn of losses to an exhaustion at $2.75bn, giving them an initial attachment probability of 1.01% and expected loss of 0.78%. This tranche of notes are offered to investors with coupon price guidance of 3.25% to 3.75%.

A $120 million Class B tranche would attach at $2bn of losses and exhaust at $2.5bn, with an attachment probability of 2.33% and expected loss of 1.58%. This tranche has price guidance of 4.5% to 5%.

A $60 million Class C tranche covers losses from $1.75bn to $2bn, with an initial attachment probability of 3.58% and an expected loss of 2.98%. This tranche is offered to investors with price guidance of 6.5% to 7.25%.

Finally, the riskiest tranche is a $60 million Class D, which would attach at $1.5bn of losses and exhaust at $1.75bn. This tranche has an attachment probability of 6.32% and an expected loss of 4.86%. These notes are marketed with coupon guidance of 9.25% to 10%, we understand.

Update 1:

We understand that all four tranches of notes have increased in size during the marketing process, with the total cat bond deal size now expected to grow by 25% to reach $375 million.

At the same time investors have shown their appetite for new cat bonds once again, helping pricing fall to the bottom of guidance across all tranches.

The Class A tranche of notes launched at $60 million has grown to $75 million in size, we’re told, while the initial coupon price guidance of 3.25% to 3.75% has now been lowered to the bottom of that range at 3.25%.

The $120 million Class B tranche has grown to $150 million in size, while the launch price guidance of 4.5% to 5% is now set to complete at the lower end of 4.5%.

The $60 million Class C tranche has grown to $75 million in size, while the price guidance of 6.5% to 7.25% has dropped down to the bottom at 6.5%.

Finally, the riskiest $60 million Class D tranche has also grown to $75 million, while its coupon guidance of 9.25% to 10% has fallen again to the bottom at 9.25%.

Update 5th December 2017:

2017 catastrophe events look set to trigger this aggregate multi-peril catastrophe bond, as Nationwide Mutual’s loss estimates have now risen above the trigger for the riskiest Class D 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.

Update, February 22nd 2018: 

The latest loss report, which was published on February 15th and features loss data up to the end of 2017, shows that Nationwide’s groun-up losses have now reached roughly $1.91 billion, with increases from the California wildfires largely the reason for the rise, especially the Thomas wildfire in December.

The riskiest $75 million Class D tranche of notes issued by Caelus Re V are now set to become a total loss, as they attach at $1.5 billion and covered losses up to $1.75 billion for Nationwide.

Investors in the Class C tranche of Caelus Re V notes, which sit directly above Class D, are now also set to experience losses, with the ground-up loss tally now having eaten roughly 63% through that layer, which attached at $1.75 billion and cover losses to $2 billion.

The ground-up loss total suggests that currently the also $75 million Class C tranche of Caelus Re V notes now face around a $47 million loss of principal.

Update April 2018:

Nationwide Mutual’s ground-up catastrophe losses continue to increase, with sources saying they now sit at around $2 billion and hence the Class B tranche of this deal is now also seen as at risk.

As the situation now stands and including qualifying losses from winter storm Riley impacts, Nationwide Mutual’s ground-up aggregate catastrophe losses are around $2 billion, sources said.

Some investors we’ve spoken with said that there is an expectation that Nationwide Mutual will also likely be able to include some severe thunderstorm losses within its aggregate before the end of the current risk period, at May 31st, which suggests the ground-up loss total could creep even higher, which puts a third tranche of Caelus Re V 2017 cat bond notes at risk as well.

If losses surpass the $2 billion mark, which we’re told is almost a given, then the $150 million Class B tranche of notes issues by Caelus Re V in the 2017 deal also come into play, as they attach at $2 billion and cover losses up to $2.5 billion for Nationwide.

With recent severe weather in the United States assumed to have caused a reasonable level of losses in Q1 and now also in Q2, there is a good chance that Nationwide may find it can add some of the impacts of recent convective storm events to its aggregate loss amount, triggering the Caelus Re V 2017-1 Class B notes as well.

Should there be further deterioration of its losses from prior events, such as the hurricanes and wildfires in 2017, then the aggregate catastrophe loss total could rise even further, placing more ILS investor capital at risk.

Currently, brokers secondary pricing sheets suggest that the $150 million of Caelus Re V 2017-1 Class B notes are definitely at-risk, with them marked down between 10% and 20% on sheets we’ve seen. So right now that suggests the potential for another $15 million to $30 million of cat bond losses to be added to the Class C and D tranches $150 million.

Update July 2019:

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.

Update August 2019:

Nationwide has made a second recovery under the riskiest tranche of the Caelus Re V 2017 cat bond issuance, the $75 million of Class D notes.

The second loss payment was for $10.3 million, taking total recoveries made to-date under this tranche to roughly $21.03 million and leaving just under $53.98 million principal outstanding remaining from the Class D notes.

Update September 2019:

Nationwide made a third recovery under the Class D tranche of notes, taking total loss payments to almost $25 million from this tranche and leaving $50.4 million of principal outstanding.

Update October 2019:

Nationwide has made a further $8.85 million recovery under the Class D tranche of notes issued by Caelus Re V, taking total loss payments to arounnd $33.4 million and leaving just under $41.6 million of principal outstanding.

Update December 2019:

Nationwide received a fifth loss payment from the Caelus Re V Class D catastrophe bond notes, with an $8.457 million reinsurance recovery made.

That takes total recoveries from what was originally a $75 million tranche of notes to almost $41.9 million, with the remaining outstanding principal of the Class D tranche falling further to just over $33.13 million.

Update, June 2020:

Half of the outstanding principal from the $150 million Class B tranche of notes of this issuance have been returned in a partial redemption, but the remaining $75 million of principal has now been retained and extended through to June 2024.

Similarly, the full $75 million of Caelus Re V 2017-1 Class C notes, which haven’t yet faced any losses, have also had their principal retained and maturity 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 so far, has also now had its maturity extended to June 2024.