Caelus Re 2013 Ltd. (Series 2013-1)

This is the third time Nationwide Mutual has issued a cat bond. It’s first cat bond, Caelus Re Ltd., was a $250m U.S. hurricane and earthquake deal issued in June 2008. It followed on that deals maturity with Caelus Re II Ltd., which was $185m in size covering the same perils.

This cat bond is being issued by a recently established Cayman Islands domiciled SPV called Caelus Re 2013 Limited which was licensed as an insurer on the 5th February. Caelus Re 2013 Ltd. will seek to issue a single tranche of Series 2013-1 notes which at a preliminary size will look for around $200m of cover.

The transaction will provide Nationwide Mutual with a fully-collateralized source of reinsurance on an indemnity and per-occurrence basis for two perils, U.S. hurricanes and U.S. earthquakes (including fire-following and sprinkler leakage).

The indemnity trigger is based on the ultimate net loss of Nationwide Mutual and a number of subsidiaries. Details of the transaction name Nationwide Mutual Ins. Co. and Nationwide Insurance Co. of FL as both cedents but we believe it covers a number of their subsidiaries too.

The notes have an initial attachment point of $1.90 billion and an initial exhaustion point of $2.20 billion. The actual amount of losses from any event will be based on the paid losses and loss reserves of Nationwide, as adjusted by certain specified factors. S&P said that it expects Nationwide to retain at least a 10% share of the ultimate net loss from any qualifying catastrophe event.

The deal runs for 2.75 years, with the first risk period set to begin on 1st June 2013 and the deal runs until 29th February 2016. Each risk period will run until 31st May and there will be a reset at that point.

Hurricane cover will be in 29 hurricane exposed states of the U.S. (Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia and West Virginia, and the District of Columbia) while earthquake is for 48 contiguous states and the District of Columbia. Reporting agencies for each peril are the U.S. National Hurricane Centre and the U.S. Geological Survey.

Historical events have been modelled and risk modeller for the deal AIR Worldwide found that only the 1812 New Madrid quake would have caused a 100% loss of principal to the notes. No modelled historic hurricanes would have caused ultimate net losses which reached the attachment point.

The initial probability of attachment for the notes is 1.28%, the initial probability of exhaustion is 1.04% and the expected loss is 1.15%. North Carolina, New York, Virgina, Texas and California are the five states which contribute the most to the expected loss by state as they are where the exposure is greatest.

Looking at the modelling for this deal the hurricane cover is aimed to provide the greatest protection for Category 3 and 4 events, for earthquake it is magnitude 7.5 to 7.9 quakes which provide the greatest contribution to the expected loss.

The deal is predominatly personal-lines coverage based, with some commercial lines business which are small to mid-range in size. Nationwide is actively reducing its hurricane exposure at this time.

We’re told by investor sources that they expect the deal to price between 6.75% and 7.75% above the investment yield of U.S. money market funds which will be used for collateral purposes.

Update:

This cat bond increased in size by 35% to $270m during the marketing phase due to investor demand. The price guidance was reduced as well down to a range of 6% to 6.75%.

Update 2:

High demand pushed pricing down even further on this cat bond, resulting in a coupon of just 5.25% which leaves Nationwide Mutual with a very good value slice of cat bond cover.