Caelus Re VI Ltd. (Series 2020-1 & 2020-2)

Nationwide Mutual Insurance Company has returned to the catastrophe bond market looking for a capital market backed source of U.S. multi-peril reinsurance protection, on both a per-occurrence and aggregate basis.

This is the insurers first cat bond issuance since May 2018 and comes on the heel of pressure on a number of its older transactions, some of which are still exposed to losses from prior year catastrophe events.

A new special purpose Class C insurer named Caelus Re VI Limited, has been registered in the Cayman Islands for this transaction, we’re told.

This eighth cat bond to take the Caelus Re moniker is the first from Nationwide Mutual to seek both per-occurrence and aggregate catastrophe reinsurance for the insurer and its subsidiaries in a single visit to the capital markets.

Caelus Re VI Ltd. is going to issue two series of notes at the same time for this deal, with five classes of notes, all of which will be sold to investors and the proceeds used to collateralise underlying reinsurance agreements between the issuing vehicle and Nationwide Mutual.

Two Series 2020-1 tranches of notes amounting to $200 million aim to provide per-occurrence indemnity reinsurance protection to Nationwide Mutual, while three Series 2020-2 tranches of notes amounting to $140 million are targeting annual aggregate indemnity reinsurance protection for the sponsor.

All five tranches of notes will cover Nationwide Mutual and certain subsidiaries against certain losses caused by the U.S. multiple perils of named storm, earthquake, severe thunderstorm, winter storm, wildfire, meteorite impact, volcanic eruption, as well as other perils.

On the 2020-1 per-occurrence side, Nationwide Mutual is looking to secure one tranche of coverage for a three year term and the other for four years, while all three of the annual aggregate 2020-2 tranches of notes will run for a three-year term.

It’s a more complex layering of notes than is typical of the previous Caelus Re cat bonds, but the reinsurance protection it affords to Nationwide will be much more substantial as a result.

A $100 million Series 2020-1 Class A-1 tranche of per-occurrence notes will provide three years of coverage, attaching at $1.95 billion of losses to Nationwide and covering up to $2.35 billion. This tranche of notes will have an initial expected loss of 1.3% at the base case and are offered to cat bond investors with price guidance in a range from 5.25% to 6%, we’re told.

A $100 million Series 2020-1 Class B-1 tranche of per-occurrence notes will provide four years of protection, covering the same layer as the A-1’s. This tranche of notes will have an initial expected loss of 1.3% at the base case and are also offered to cat bond investors with the same price guidance, so 5.25% to 6%.

A $50 million tranche of Series 2020-2 Class A-2 notes, the first aggregate tranche, will provide three years of protection attaching at $1.775 billion and covering losses to $1.88 billion, with events needing to surpass a $50 million franchise deductible. These notes will have an initial expected loss of 0.97% at the base case and have price guidance of 5% to 5.75%.

A $50 million tranche of Series 2020-2 Class B-2 notes, also annual aggregate and providing three years of protection, would attach at $1.575 billion and covering losses to $1.775 billion, again after a $50 million franchise deductible per event. These notes will have an initial expected loss of 1.7% at the base case and have price guidance of 7% to 8%.

The final $40 million tranche of Series 2020-2 Class C-2 notes, also annual aggregate and providing three years of protection, would attach at $1.28 billion and covering losses to $1.575 billion, again after a $50 million franchise deductible per event. These notes will have an initial expected loss of 4.1% at the base case and have price guidance of 12% to 13%.

So the two Series 2020-1 per-occurrence tranches of notes will together cover a $400 million layer of Nationwide Mutual’s reinsurance tower, while the three Series 2020-2 tranches will stack one on top of the other, covering a percentage of a $600 million layer of the sponsors aggregate reinsurance program.

The size of the layers mean there is room for each tranche of notes to upsize, should pricing and ILS investor appetites prove accommodating.

Update 1:

We’re now told that the issuance looks set to upsize from the initial $340 million goal, with the target for the Caelus Re VI 2020 catastrophe bond issuance now lifted to up to $500 million in size.

That would make this new cat bond the largest Nationwide Mutual Insurance has ever sponsored, a record currently held by the insurers 2018 deal that settled at $450 million.

At the same time, all of the tranches have seen their pricing guidance shifted towards the mid to upper-ends of the initial ranges.

The first Series 2020-1 Class A-1 tranche of per-occurrence notes that will provide three years of coverage are now targeting between $100 million and $150 million in terms of issuance size. With an initial expected loss of 1.3% at the base case, these notes were offered to cat bond investors with price guidance in a range from 5.25% to 6% to begin, but we’re now told this has tightened to 5.5% to 5.75%

The Series 2020-1 Class B-1 tranche of per-occurrence notes, providing four years of protection,  are also now targeting between $100 million and $150 million of cover for Nationwide. This tranche of notes have an initial expected loss of 1.3% at the base case and were offered to cat bond investors with the same price guidance, so 5.25% to 6%, which again has now tightened to 5.5% to 5.75%.

The Series 2020-2 Class A-2 notes, set to provide three years of aggregate reinsurance protection, are now targeting between $50 million and $75 million in terms of size. These notes have an initial expected loss of 0.97% at the base case and were at first offered with price guidance of 5% to 5.75%, but this has now shifted to 5.5% to 5.75%, we’re told.

The Series 2020-2 Class B-2 notes, also annual aggregate and providing three years of protection, are also now aiming for an issuance size of between $50 million and $75 million. These notes have an initial expected loss of 1.7% at the base case and were marketed with price guidance of 7% to 8%, which we now understand towards the upper-end at guidance of 7.5% to 8%.

The final Series 2020-2 Class C-2 tranche of notes, also annual aggregate and covering three years, are now looking to secure. between $40 million and $50 million of cover for the sponsor. These notes have an initial expected loss of 4.1% at the base case and were at first marketed with price guidance of 12% to 13%, but this has now shifted upwards again to 12.75% to 13%, sources said.

Update 2:

This Caelus Re VI 2020 catastrophe bond has now settled at $490 million in size, so representing a 44% increase from the initially marketed tranche sizes.

The first Series 2020-1 Class A-1 tranche of per-occurrence notes, providing three years of coverage, settled at the upper-end of $150 million and with pricing fixed at 5.5%, so a little below the mid-point of guidance.

The Series 2020-1 Class B-1 tranche of per-occurrence notes, providing four years of protection, also settled at the top-end of $150 million and also priced at 5.5%.

The Series 2020-2 Class A-2 notes, set to provide three years of aggregate reinsurance protection, settled at the upper-end at $75 million with pricing fixed at 5.5%, so towards the upper-end of guidance.

The Series 2020-2 Class B-2 notes, also annual aggregate and providing three years of protection, also settled at $75 million and priced at 7.75%, so almost at the top-end of guidance.

The final Series 2020-2 Class C-2 tranche of notes, also annual aggregate and covering three years, settled at the lower-end of their target size of $40 million, with pricing fixed at 12.75%, again in the upper-half of guidance.

Update April 2021:

Nationwide’s aggregate losses for the current risk period have now risen to a level where tranches of this cat bond are threatened.

As of April 14th, the insurer had reported an ultimate of almost $1.5 billion for the risk period, with roughly $335 million of losses appears to have been added by the February winter storms and deep freeze that impacted a wide area of the United States and in particular the state of Texas.

The Caelus Re VI 2020-2 Class C-2 notes, a $40 million layer providing the insurer annual aggregate reinsurance, have their attachment point set at $1.28 billion and cover a percentage of losses up to $1.575 billion, so the information we have sourced seems to suggest there is a strong chance of this tranche being a total loss.

Secondary cat bond market pricing sheets reflect that, with the Caelus Re VI 2020-2 Class C-2 notes priced down for bids in the single digits, implying the market believes at least a 90% loss of principal will occur.

The $75 million Series 2020-2 Class B-2 notes from this Caelus Re VI issuance, also annual aggregate and providing three years of reinsurance protection, could attach at $1.575 billion and cover losses to $1.775 billion, so also appear threatened. This tranche is also heavily marked down on broker pricing sheets, at levels implying a 75% loss of principal.

The also $75 million Series 2020-2 Class A-2 notes from this Caelus Re VI issuance are also marked down, by around 30%, but attach much higher at $1.775 billion, covering losses to $1.88 billion, so while exposed to Nationwide’s rising annual losses would need to see the aggregate ultimate loss rise much further.